Hindustan Unilever: Fair, not so lovely

Weak volumes, loss of market share and the poor performance of the personal products segment are causes for concern.

Hindustan Unilever’s (HUL) home and personal care (HPC) division did reasonably well in the March 2009 quarter growing by 11.5 per cent, but what’s disappointing was the high-margin personal products division (PP) which grew just 2 per cent. Obviously, there has been some loss in market share in oral care, perhaps because the management didn’t quite get the pricing right. It’s taking some action now with brands such as Pepsodent but it’s a pity the PP business has been somewhat erratic over the years because it is a key growth area.

Meanwhile, the soaps and detergents segment did well during the quarter—-cuts in the prices of Wheel and Lifebuoy and grammage increases in Lux, appear to have helped the business grow a strong 16 per cent and haven’t hurt profit margins either. However, growth for HUL during the March quarter appears to have come more from price increases rather than volumes which have fallen by about 4 per cent during the quarter and that takes way somewhat from the quality of the numbers.

While the operating profit margins expanded a very remarkable 300 basis points to just under 13.8 per cent , some of it has come from lower expenses on raw materials as also a 20 basis points savings on ad spends. The management concedes that HUL is losing out on volumes and market share —-especially at the lower end because the space is more price competitive—- and is taking corrective action in the form of price cuts.

While the strategy is fine, HUL needed to have initiated the price cuts a little earlier so as to be able to compete at a time when consumers have started down trading. The FMCG firm, however, has had some success with premium products such as Dove. At the current price of Rs 227, the stock trades at 21times estimated 2009-10 earnings.