Hindustan Unilever: Voluminous comeback

Consistent volume growth was compensated by price cuts undertaken in the recently concluded quarter

Hindustan Unilever recorded an impressive set of numbers for the September quarter. Volumes witnessed double-digit growth for the third consecutive quarter at 14 per cent, highest in more than a year, albeit on a lower base.

However, sales growth was constrained at 10.7 per cent to Rs 4,681 crore due to the carry-over impact of earlier price cuts in the soaps and detergents (S&D) business and subdued overall growth of 9.4 per cent in the home and personal care segment.

HUL managed to reverse the declining trend in operating profit margins (OPM), which inched up 77 basis points (bps) to 12 per cent despite higher other expenses. However, adjusted net profit margin slipped 124 bps to 12.1 per cent, as benefits of other income were negated by higher taxes and depreciation.

While sales of personal care products improved 15 per cent, aided by double-digit volume growth for the sixth consecutive quarter, competition ate into the PBIT (profit before interest and tax) margins, which tanked 330 bps to 23 per cent. However, foods business posted impressive revenue growth of 13 per cent, backed by stable PBIT margin of 12.2 per cent, courtesy strong momentum in Knorr and Kissan.

Going ahead, while volumes are expected to rise due to good monsoon and higher spending power with rural people, price hikes (five-eight per cent in S&D) undertaken in the recently-concluded quarter may take a toll on the company’s financials.

Margins could also be affected by higher advertisement spends and an uptrend in raw material prices (mainly crude-linked), followed by benefits of low-cost inventory exhausting. To top it all, these factors don’t justify ultra-high valuations of 28x 2011-12 estimated earnings.