HUL: Where is the pre-GST disturbance?

Volumes remain flat in Q1; price hikes and cost-control measures help

June quarter results of India's leading FMCG company- Hindustan Unilever (HUL) may be interpreted in two ways. A pessimist would be tempted to point out that a flat volume growth for a leading organised giant is not much to be contended with. But a pessimist may be a minority as a majority of analysts emphasise that flat volume growth isn't bad for HUL given the circumstances in June quarter (Q1). Abneesh Roy of Edelweiss, who expected volumes to decline by 1 - 2 per cent in Q1 given the destocking at the dealers' end, says that the numbers have bettered his expectations.

Impressively, despite a zero volume growth, revenues at Rs 8,401 crore grew by 5.2 per cent year-on-year, while net profit expanded by 17.5 per cent to Rs 1,296 crore. What's also comforting is the 180 basis points (bps) year-on-year increase in operating profit margins to 21.9 per cent in June quarter. Interestingly, even gross margins (revenues less cost of goods sold) marginally increased to 52.1 per cent in Q1 indicating that raw material prices are largely under check and haven't risen as anticipated earlier. These numbers are ahead of Street expectations and point out that the price hikes taken in the past and cost control measures have helped HUL.

Further, these numbers have been achieved despite its core personal care segment posting just a 3.5 per cent year-on-year growth in revenues. The segment comprising of soaps, shampoo and skin care products accounts for 47 per cent of total revenues. Personal care segment's EBIT (earnings before interest and tax) margin expanded by only 50 basis points to 24.7 per cent, though it remains to the most margins accretive segment for HUL. Other segments such as home care and refreshments posted 230 bps and 310 bps year-on-year increase in EBIT margins. On the whole, it was a satisfying performance across product categories.

A positive impact of ongoing cost rationalisation drive (an effort driven by its Dutch-parent Unilever) was visible in Q1. Advertisement spends, employee costs and other expenses as a percentage of sales were maintained near-about or marginally lower than a year-ago level of 4.9 - 14.7 per cent in Q1. This is why despite a marginal 1.7 per cent increase in these costs, it didn't affect the company.

However, going ahead, the room to implement more price hikes may be limited. In fact, the management has stated that it may not take a price hike in soaps and detergent segment for the next two - three months.

Positively, a good monsoon spell and a relatively low base of FY17 should help HUL sustain the Q1 momentum on the revenue and profitability fronts, with some expansion in volumes. Roy extrapolates the Q1 performance also indicates the partial return in rural demand.

Overall, the Street is expected to absorb HUL's Q1 show positively on Wednesday. Analysts believe, despite 40 per cent year-to-date price appreciation there is some more room for stock rerating as earnings upgrade for FY18 and FY19 looks likely.