FMCG major Hindustan Unilever (HUL) posted disappointing numbers for the December 2012 quarter on the back of weak consumer sentiment especially in discretionary categories. The increase in royalty payouts from February 2013 added to its cup of woes, bringing down it stock price. In this interview with Viveat Susan Pinto, HUL's chief financial officer R Sridhar responds to questions on the likely impact on HUL's margins as a result of the move to hike royalty. He also throws light on the challenging environment in FMCG. Edited Excerpts:
What will be the impact on margins as a result of the increase in royalty?
You cannot say that an increase in royalty will result in an impact on margins. There is a cost impact, yes, which is 0.5% of turnover from Feb 1, 2013 to March 31, 2014. Thereafter the increase will be in the range of 0.3 to 0.7% per year. But bear in mind we are lower than other global players who pay royalty. And this increase is a fair price if we have to compete even more effectively and continue to deliver superior growth and profitability in an environment that is going to become even more competitive particularly from global majors.
But will you take shareholder approval for the increase in royalty through a special resolution?
No that is not required. Unilever, as you are aware, has been increasingly globalising its resources to provide greater expertise, superior innovations and scale advantage for all its entities across the world. There has been an increase in emphasis on developing & emerging markets, which give Unilever over 52 to 53% of its revenues. As a result, HUL is enjoying the benefits of an increasing stream of new products and innovations, backed by technology and knowhow from Unilever. There had to be a fair recovery of costs. The HUL board deliberated on the proposal mooted by Unilever for a review of the royalty arrangement and then took a call. It was satisfied with the due diligence done on the matter, not to mention that we are consistent with Government of India policy pertaining to royalty payouts.
Now that you are indicating that your pipeline of products from Unilever's global portfolio will go up, will that then mean that your own indigenously developed products or innovations will come down. The last you did was the water purifier Pureit, which was developed and tested in India, and following its success was exported abroad. Can we expect more such work to happen in India?
Unilever's R&D efforts are increasingly getting aligned across the world. The R&D centre in Bangalore does not work in isolation. It is part of a seamless network that sees it contributing to Unilever's global repository of knowledge, not just HUL's alone. To answer your answer, India-specific innovations will continue. But in a globalised world, the integration across the world will be faster.
The price-led growth of 9% for the December quarter was primarily in which segments?
Soaps & detergents was one segment that saw price-led growth. I will not be able to indicate how the scenario will pan out in the forthcoming quarters, whether price will continue to drive numbers or volumes. But suffice to say that the environment remains challenging in the near-term. The competitive intensity is high, so are ad spends. The pressure on discretionary categories will persist. One saw it in this quarter as well as the last quarter. So yes, we will have to navigate ourselves through these challenging times.
What was the rationale for stepping into hair oils? That is a competitive category.
We are at the premium end with the Dove Elixir range of hair oils. It was a natural extension keeping in mind Dove's moisturising property. From skin, we have now taken that promise to hair. Moreover, there is growth happening at the premium end of the hair oil market. So it made sense to step in. India is the first market where the Elixir range has been launched. You never know, it could be taken to other markets too.