HUL: Where's the slowdown?

Q1 shows healthy mix of value and volume growth in home and personal care

There’s no sign of any slowdown in consumption, if Hindustan Unilever Ltd’s (HUL) Q1 numbers are any indication. HUL surprised the Street positively with its robust growth in the June quarter, equally led by both volume and value. What has worked for it is enhanced focus on distribution and rejuvenation of product portfolio.

Analysts had expressed doubts in the last couple of quarters about HUL’s strong growth coming off as the economy slowed and the high base effect kicked in, but the company has disproved this theory. The domestic consumer business (FMCG + water) grew 19 per cent in teh first quarter. Home and personal care (HPC) grew 20.6 per cent while the foods business grew 10.8 per cent. Kaustubh Pawaskar of Sharekhan says: “The company has posted strong operating performance in this quarter, with gross margin improving by 200 basis points to 46 per cent and operating margin by 107 basis points to 13.4 per cent.”

The star of the quarter is clearly the soaps and detergents business, which has grown by 24 per cent. Profitability in this segment has also improved. The business is low-margin and is also very competitive. HUL’s Ebit margins in soaps and detergents segment has expanded by 295 basis points YoY to 12.2 per cent in the quarter. According to Emkay Global, “This indicates double-digit volume in the category. All the growth seen in this category is not price-led. The company’s focused on maintaining its volume growth, which is why it has increased ad spends as a percentage of sales by 150 basis points in Q1 to 12.8 per cent.”

The personal products business has grown 17 per cent in the quarter. Contrary to the concerns of some analysts, this business has delivered double-digit volume growth across categories. Hair and oral care have done particularly well. The segment has maintained its Ebit margins at 26 per cent.

However, the foods business grew at a modest 11 per cent. The main reason for this drag is beverages, which grew by seven per cent. While the growth in this quarter may have surprised analysts, many say a weak monsoon could impact volumes in the coming quarter. Though commodity prices have corrected, it has not benefited HUL, as the rupee’s depreciation has erased the gains. Given its approach to pricing and cost efficiency, analysts don’t expect growth to come off substantially this year.