Cost control measures help HUL regain strength, sales volume up 11% in Q3

Curbing raw material costs crucial as note ban, GST overhangs are behind

Is the worst behind for India’s FMCG companies? At least the December quarter (Q3) results reported by FMCG major — Hindustan Unilever (HUL), which were ahead of the Street’s estimates on all counts, says so. 

HUL’s better-than-anticipated volume growth of 11 per cent versus estimates of 8-9 per cent increase, and operating profit margins suggests that demonetisation is a thing of the past and industry has tackled the hiccups of the goods and services tax or GST quite in its stride. 

In anticipation of good results, the HUL stock scaled to its all-time high on Wednesday, before closing marginally in the red at Rs 1,372. Analysts believe there is more upside for the stock. 

The faith comes from HUL’s robust revenues (Rs 85.90 billion), which grew 17 per cent year-on-year (y-o-y) after adjusting for excise duty and the GST-related issues; the best performance in recent times. Operating profit margin at 19.5 per cent in Q3 was also up about 300 basis points (bps). However, if the aforesaid tax related adjustments are adjusted, improvement in profitability is restricted to 110 bps, which again is higher than expectations.

HUL needs to be credited for some of the aggressive cost control measures such as zero-based budgeting, initiated in the recent times. Analysts believe much of the quarterly growth is evenly distributed between rural and urban demand. 

With all segments of HUL (home care led the show) boosting Q3 numbers, it reiterates a broad-based improvement. Even oral care (mainly toothpastes), which was under pressure due to competition from Patanjali, is showing green shoots of recovery, says HUL’s management. Effect of premiumisation in segments such as home care and personal care are showing up neatly, and better acceptance for its new range of ayurvedic products are also encouraging. Net profit came in at Rs 13.26 billion, up 28 per cent y-o-y. Bloomberg had pegged revenue at Rs 81.82 billion and net profit at Rs 12.19 billion.

However, the concern remains due to trouble from increasing raw material costs, mainly crude oil. Cost of raw materials consumed as percentage of revenues rose to 37 per cent from 31 per cent a year ago. 

“Crude-led inflationary pressures are rising, and it’s important to remain agile and manage portfolio to drive results,” Srinivas Phatak, executive director and chief financial officer, HUL, said. 

The pressure can partly be seen in the 70 bps sequential fall in operating profit margins. 

Overall, with volumes yet again driving growth and cushion still available to keep costs in check, sustaining margins appears doable. There is also room for price hike in future, if necessary. Analysts remain optimistic despite stock valuations expensive at 47 times its FY19 estimated earnings.