HUL: The top line's in trouble

The company has clocked poor volumes in key categories, resulting in single-digit revenue growth.

Not having focused enough on mass market segments at a time when consumers were down trading in an inflationary environment has proved to be costly for Hindustan Unilever. In contrast to other FMCG players, most of whom clocked double digit volume growth, Hindustan Unilever’s total volumes for the September 2009 quarter were up a meagre 1 per cent, with the result that revenues for the company rose just 5 per cent to Rs 4,228 crore.

That’s despite a good performance from the personal products segment which saw strong volumes and a smart increase in revenues of 13.4 per cent, on a high base. The damage has been severe in the key soaps and detergents segment which is understood to lost volumes and market share.

While the company has taken price cuts and is promoting some of the brands, winning back market share from the competition will be difficult and expensive. Already the earnings before interest and tax (Ebit) margins for the segment were up just 9 basis points despite the fact that input costs have come off.

Analysts believe that the increase in adspends could be a reason for the muted margins. HUL has been spending aggressively, as is clear from the fact that adspends are up 41 per cent, 8 times the revenues growth. Of course, the spending has paid off in categories such as personal products, where margins are up a sharp 200 basis points.

Clearly, the strategy to create brands at the high end, in areas such as skin care, is working well and should continue to pay off. In fact, the good performance from the personal products segment is a reason why despite a lukewarm growth in the top line and an increase in adspends of 320 basis points, HUL’s operating margin rose 150 basis points to 15.4 per cent.

However, categories such as oral care are losing their market share. While revenues for processed foods segment were flat during the quarter, and the business reported losses, the management says the performance has been fairly strong. HUL’s beverages business though has done reasonably well. Since HUL could take time to reverse market share losses, earnings are expected to grow by 16-17 per cent in 2010-11.

At the current price of Rs 278 the stock trades at around 22 times estimated 2010-11 earnings and most analysts have a neutral view on the stock.