Note ban impact: In muted Q3 show, HUL's net up 7% on exceptional income

Net revenues down fell 0.7% YoY to Rs 7,706 crore; PAT declines 10% to Rs 920 crore

Demonetisation has hit consumption demand in rural markets much worse than the urban markets. That is the key reading from the country’s largest consumer staples company Hindustan Unilever’s (HUL) results for the December 2016 quarter (Q3). This weakness could also be reflected in other rural-focused consumer companies’ quarterly results, believe analysts.

For Q3, HUL’s volumes fell four per cent, but an equivalent increase in realisations aided revenues. HUL’s net revenue (net sales plus other operating income) thus, fell 0.7 per cent to Rs 7,706 crore, compared to Rs 7,764 crore in the year-ago quarter. While the company’s reported profit after tax increased 6.8 per cent year-on-year (YoY) to Rs 1,038 crore in December 2016 quarter, if one-off items were to be removed, the net profit - at Rs 920 crore - was also down 10 per cent YoY.

HUL’s raw material costs, as a percentage of net revenues, surged 124 basis points (bps) to 33.4 per cent, on the back of rising vegetable oils and crude oil prices. Notwithstanding the tweaking in advertising spends, which fell 37 bps to 11.5 per cent of net revenues, its operating profit margin contracted 40 bps to 17.5 per cent.

Lower other income was another pressure point on the bottom line, even as fall in tax rate provided a marginal offset. While these numbers were largely in line with Street expectations, they highlight the stress faced by consumer companies after the cash crunch arising from currency purge.

For Q3, the company reported an exceptional income of Rs 153 crore, against Rs 80-crore exceptional expense in the year-ago period.

During the quarter, the squeeze in liquidity resulted in reduced trade pipelines and lower consumer offtake, said the fast-moving consumer goods major in its results press release. “We responded to these adverse market conditions with speed by rejigging our supply chain, supported our channel partners by extending credit and enhanced our direct distribution coverage,” added the release.

The company’s two largest segments – home care and personal care - witnessed the subdued performance. While home care revenues inched up a per cent to Rs 2,689 crore, personal care dipped three per cent to Rs 3,980 crore. Double-digit growth in Surf, as well as home care liquids fuelled growth in the home care segment. The company took price hikes in the personal wash (Dove, Lux, Hamam, Lifebuoy) segments amid rising input costs. This, coupled with weak demand sentiment due to demonetisation, impacted this segment’s performance.

Refreshments segment, which comprises brands such as Taj Mahal, Red Label, Taaza, Bru, Kwality Walls ice cream, amongst others, witnessed the highest revenue growth of eight per cent in the quarter to Rs 1,164 crore. Healthy traction in tea, ice cream and frozen desserts were the key positives. Food segment (Kissan, Knorr, Annapurna) revenues were flat at Rs 279 crore, up 0.5 per cent over the year-ago quarter. Revenues from exports, infant and feminine hygiene care products, which form the ‘others’ segment, fell a huge 27.3 per cent to Rs 195 crore.

Thanks to a weak revenue show, all segments witnessed a contraction in the respective operating profit margin in the quarter.

While south and west India were least impacted by demonetisation, central India was the worst hit, the management indicated in an after-results conference. While things have started to return to normal, urban is recovering at a faster clip than rural markets, according to the company management. Harish Manwani, chairman, HUL, said, “There are early signs of normalisation and our focus continues to remain on innovation-led volume growth and improvement in margins.”

Overall, the recovery in rural markets, which form 45-50 per cent of HUL’s revenues, is likely to be gradual in nature, indicating perhaps there is still some more pain likely in the coming quarters. The HUL stock closed 0.25 per cent up on Monday at Rs 863.25. The results came after market hours.