HUL volumes disappoint, rural demand crucial

Weakness in personal products limit volumes; low commodity prices aid margins, help meet profit estimates

Consumption demand is not out of the woods yet. That is the key reading from FMCG (fast-moving consumer goods) firm Hindustan Unilever Ltd (HUL)'s March quarter (Q4) results. Weakness in personal products segment (30 per cent of revenues) due to phasing out of excise duty benefits was one factor that curtailed overall volume growth to four per cent in Q4. This number lagged Street expectations of five-seven per cent and was HUL's lowest volume growth in the past five quarters.

While a one-time excise duty refund had boosted the personal products’ March 2015 quarter growth, the segment's revenue growth of 2.8 per cent in Q4 was still unimpressive at an 11-quarter low.

The demand slowdown, especially rural, and residual impact of channel correction in October-November, restricted volumes.

Revenue growth in soaps and detergents (47 per cent of revenues) was 2.2 per cent: The highest in four quarters. As a result, net sales grew below five per cent for the third quarter. At Rs 7,809 crore, net sales were up 3.4 per cent over year and missed Bloomberg consensus estimate of Rs 7,986 crore.

Analysts say the advertising spend grew slower than estimates, and partly curtailed revenue. Ad spends as a per cent of total net sales were up 39 basis points over year to 14 per cent, indicating HUL had retained most of input cost savings.

Benign commodity prices led to 234-basis-point savings in input costs, which formed 36.4 per cent of sales. Ebitda (earnings before interest, taxes, depreciation, and amortisation) margins expanded 133 basis points to 18.8 per cent in Q4. This, with lower taxes, led to a 13.2 per cent growth in net profit (excluding one-off items) to Rs 1,031 crore, in line with Bloomberg consensus estimates.

The deflationary trend in soaps and detergents appears toning down on firming palm oil prices. HUL can gradually reverse price cuts and promotions in this segment. HUL outpaced Godrej Consumer Products, which registered a six per cent drop in its soap revenues in the quarter.

Weak rural demand is an overhang. But, given expectations of a good monsoon and higher disposable income, due to one-rank-one-pension and seventh pay commission hike, things could start looking up in FY17.

Competition from Patanjali Ayurved will be a key monitorable. Against this backdrop, valuations of 40 times one-year forward earnings will keep HUL's stock price in check.