Hindustan Unilever: Volume growth falls to 5%

Revenue growth at 10 per cent indicates consumer demand is slowing across the board

Hindustan Unilever Ltd’s (HUL) third quarter numbers are an eye-opener for the markets and the economy at large. Consumption, which had held on through the slowdown, is beginning to crumble. The company reported a year-on-year (y-o-y) growth of 10 per cent in net sales and a five per cent uptick in volumes in Q3. The volume growth is the lowest since March 2010, says Rikesh Parikh of Motilal Oswal Securities. The market was estimating a 13 per cent growth in sales and eight to nine per cent growth in volumes. Dhananjay Sinha of Emkay Global believes the consumer behemoth’s quarterly numbers are finally reflecting the broader trend in the economy.

Though the first signs of consumption slowing started four quarters ago, companies like HUL maintained their double-digit volume growth, equally supported by steady price hikes. For instance, HUL in the third quarter of FY12 grew revenue by 16.4 per cent y-o-y, on the back of nine per cent volume growth. Over two years, the company has grown sales by hiking prices in a slow and steady fashion, even as demand for its products picked up on re-launches. However, now there is little headroom for price hikes and the actual demand is slowing down in the near term, at least. Though things may look up closer to elections, the current outlook is not promising.

In the third quarter of FY13, the saving grace has been the soaps and detergents segment, which grew 20 per cent. However, the worst fears of analysts are coming true as margins have shown a decline. Margins for the soaps and detergents segment have contracted 100 basis points annually to 12.4 per cent. The high-margin personal care segment has disappointed, too, as it clocked growth of 13 per cent. Margins, however, expanded by 140 basis points to 28.3 per cent. While beverages have grown at 18 per cent, the foods business is clearly struggling. The signs of stress on volumes are also apparent from the company’s advertising spends, which have risen both annually and sequentially. In the second quarter of the financial year, advertising and promotion spends were 11.8 per cent of sales but this has moved up by 100 basis points in the third quarter to 12.8 per cent.

The company has also announced it has modified its royalty arrangement with the parent. Royalty payout will move up from 1.4 per cent of net sales to 3.4 per cent by FY18 in a phased manner. Analysts expect a three to five per cent contraction in operating profit after this arrangement kicks in from next year. Motilal Oswal Securities is expecting royalty expenses to go up 30 basis points each year after FY14 till FY18.