HUL: Fair, not so lovely

The lower than expected growth in volumes is somewhat worrying.

Hindustan Unilever’s core operating margins for the December 2008 quarter may have expanded by about 80 basis points y-o-y but that’s more the result of lower expenses on marketing and promotions –down 160 basis points y-o-y—and other savings. Had adspends been at last year’s levels, the growth in the earnings before interest and tax would have been closer to 4 per cent instead of 15 per cent. Also, while the FMCG major’s headline numbers for the quarter look reasonably good---a near 17 per cent rise in the top line to Rs 4,300 crore and an increase in adjusted profits of about 13 per cent to Rs 610 crore, the lower than expected volumes –up just 2.3 per cent—is cause for concern.

The soaps and detergents segment, for instance, saw a smart 25 per cent rise in sales, but volumes actually fell. The personal products business, on the other hand, was driven by volumes that were about 10 per cent higher but margins have remained flat at just under 33 per cent. It will be difficult for HUL to raise prices in the near future-- the increase in realisations is possibly at its highest level in about four years.

In fact, the company recently cut the price of Lifebuoy soap and a few more price cuts should help revive volumes. However, it’s unlikely that the robust sales numbers of 18-20 per cent seen in the past few quarters will sustain and going ahead, the top line will probably grow in low double or high single digits. With input prices coming off though, the operating margins could expand even if adspends are upped.

During the quarter, the company lost market share across almost all key categories except laundry. For sure, it is not easy to continuously gain market share especially in segments where the base is already high and HUL has done a fairly good job of keeping smaller players at bay. There are some categories where it has gained share at the top end of the range---shampoos for instance---which is creditable.

But in the long run, HUL needs to grow volumes across price points to keep competitors like ITC from making inroads into key segments. HUL was the best performing Sensex stock in 2008; given that earnings will grow at a much better pace of an estimated at 17 per cent in 2009-10, than for the rest of the market, it should continue to outperform.