Price increases save the day for HUL

Weak revenues and operating profit margins pull down the company's earnings

Hindustan Unilever Ltd (HUL)’s December quarter (Q3) results were broadly on expected lines with net revenues (including other operating income) down 0.7 per cent at Rs 7,706 crore and net profit before exceptional items down 10 per cent at Rs 920 crore, over a year ago. Although this is the first decline in revenue and profits after many quarters, note that expectations were already muted in anticipation of pressures from cash crunch caused by demonetisation. The worry is what the near future holds.

Results give a glimpse of the demand and, to some extent, the outlook: Both not good. Demand and wholesale channel in rural markets have borne the brunt of note ban and are expected to recover only gradually. For Q3, HUL's volumes were down four per cent year on year, the biggest decline in at least seven quarters. Even in September quarter, volumes had fallen by one per cent.

Rising prices of crude oil and its derivatives added to woes. Despite price hikes to pass on rising input costs and lowering ad spends, operating profit margin contracted 70 basis points year on year to 16.7 per cent in Q3. There were additional cost pressures related to demonetisation in Q3, which also had a bearing on HUL’s margins. Had it not been for price hikes, the performance could have been worse.

While price hikes (of four per cent) helped offset dip in volumes and cushioned margins, they also led to weaker performance of personal wash segment. The company will continue price hikes across select products to pass on some of the pain from higher input costs. However, given subdued demand, it remains to be seen if HUL can strike a balance between growth and profitability.

 

For Q3, most of HUL's business segments saw weak revenue growth as well as falling operating profit margin. These weighed on HUL’s net profit before exceptional items or one-offs, which fell even as the company’s tax rate came down a bit.

Premiumisation continues even today. Higher premiumisation can act as a key support to margins on a longer-term basis, but may not be enough to boost overall revenue growth. Thus, demand holds key.

At current levels, HUL trades at 38 times FY18 estimated earnings, above its historical average one-year forward price-to-earnings of 35. Given the backdrop and high valuations, the stock is likely to remain in check.