 "HUL: Price hikes, cost mgmt aid earnings")
This was despite India's Rs 2.5-lakh-crore fast-moving consumer goods market seeing contraction in volume and value growth of less than four per cent, said HUL Managing Director Sanjiv Mehta.
Analysts had expected HUL to fare well, even as its parent, Unilever, reported a dismal set of numbers last week, owing to a weak performance across Asia and Europe. The world's second-largest consumer goods company reported underlying volume growth of 2.1 per cent for the September quarter, 43 per cent below the consensus estimate of 3.7 per cent and the weakest performance in five years.
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At five per cent, HUL's volume growth was in line with Street estimates, flat compared to the year-ago period and marginally lower on a quarter-on-quarter basis. For the June quarter, HUL had surprised the Street with six per cent volume growth, 300 basis points higher than the consensus estimate.
For the September quarter, net profit stood at Rs 988.16 crore, against Rs 913.8 crore a year earlier. The company cut its advertising and sales promotion expenditure 175 basis points; its gross margin fell 160 basis points. Gross margins take into account the cost of raw materials/inputs alone.
HUL's profit before interest and tax (PBIT) margin was 15.6 per cent, compared with 15.1 per cent in the year-ago period. The soaps & detergent business, the company's second-largest profit contributor (42 per cent), saw PBIT margin fall 41 basis points year-on-year to 13.61 per cent; for other businesses, PBIT margins rose 36-168 basis points.
The company's profit was also boosted by higher exceptional income of Rs 48.68 crore, compared with Rs 33.43 crore in the year-ago quarter.
Soon after the results were announced, the HUL stock fell 5.5 per cent to an intra-day low of Rs 716.05 compared to its previous day's closing price of Rs 757.9 on the BSE. It closed at Rs 721.9, down 4.75 per cent.
Abneesh Roy, associate director (institutional equities-research), Edelweiss, said, "The gross margin erosion was a dampener, resulting in the stock price tanking. In my view, the second reason why investors reacted negatively was because the company's operating margins were held up because it cut advertising & sales promotion (ASP) expenditure for the quarter. When competitive intensity is high, cutting ASP spends is not a very good sign."
Another reason behind the stock's fall could be its significant outperformance against the Sensex in the past three months. While the Sensex has risen 2.11 per cent during this period, HUL's shares have gone up 18.4 per cent.
Mehta said though the environment remained challenging, the company was hopeful of a recovery in the medium term. "Rural sales growth was better than urban growth in the second quarter, with a pick-up in sales of low-unit packs in categories such as laundry, cleansing and oral care," he said.
Among individual businesses, HUL posted 14 per cent growth in packaged foods, followed by 11 per cent growth in soaps & detergents, 10 per cent growth in personal products and seven per cent growth in beverages. Roy said the personal products segment, which performed well consistently through the past few quarters, fell short of expectations in the September quarter because of the slowdown in urban areas. "While the sentiment has picked up, it is yet to translate into real spending and this was visible in the revenue growth seen in personal products," he said.
It is expected HUL will boost its urban portfolio, as analysts and experts predict an urban recovery ahead of a rural recovery by the third or fourth quarter of this financial year. Mehta said remain focused on improving volume growth, as real spending by consumers was visible in the coming months.
"HUL is well placed to take advantage of the urban recovery, as it has been bracing up for it, adding about a million new outlets to its direct reach, primarily in the cities," Roy said.
Additionally, gains from a fall in commodity prices would be visible from this quarter, said the company management. This is likely to help the company gain on the profit margin front.