HUL: Battling for market share

Efforts to gain market share may take their toll on the balance sheet, but will give benefits in the long term.

Hindustan Unilever’s (HUL’s) efforts to maintain leadership in the highly-competitive fast moving consumers goods (FMCG) sector will surely have some negative impact on the company’s financial numbers, especially on profitability.

HUL saw a 7.1 per cent year-on-year rise in sales to Rs 318.2 crore and 11 per cent growth in volumes. This was lower than the consensus estimates, but the 60-basis-point rise in gross profit margins surprised analysts. Lower raw material costs made up for the price cuts in the detergent segment, which accounts for nearly half the company’s revenues. However, rising competition, product launches and re-launches escalated advertising spends to around 15.7 per cent of sales (up 34 per cent year-on-year).

Earnings before interest, depreciation, tax and amortisation margins declined 190 basis points to around 14 per cent, as operational expenses increased 3.13 per cent.

What certain analysts call as ‘irrational competition’ in the FMCG segment will continue to take toll on the company’s profitability. The low-cost hedges, like managing raw material cost, are likely to wane in the coming quarters, reckon analysts. The pressure on ad-spends may continue, as the management looks at tripling the direct rural coverage, tailoring products to suit needs of different consumers in different geographies, and tapping new growth opportunities. This may adversely affect the company’s balance sheet in the medium term, but is expected to generate returns in the longer run, as the market share and presence is consolidated.

There is good news on this front, as the ‘Pure-it Compact’ water purifier, priced at Rs 1,000, has been successfully launched. Also, ‘Comfort’ is seen to be creating inroads in the fast-growing fabric conditioners segment. The Fair & Lovely and Rin brands have been relaunched. The tea business has grown with the rollout of Brooke Bond ‘Sehatmand’. These are positive indicators, but currently at the horizon.