 "Price deflation impacts HUL")
HUL's revenue fell short of Bloomberg consensus estimate of Rs 7,979 crore.
A large part of the gross margin gains arising out of lower input costs were reinvested back in the form of higher advertising and promotional spends. Thus, a 272 basis points fall in input costs to 37.1 per cent of sales was largely offset by a 225 basis points increase in advertising spends to 14.6 per cent of sales. Overall, the Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin expanded by 32 basis points to 16.96 per cent on account of savings of 96 basis points in total expenses (aided by lower employee costs).
The gains at the operating level did not flow to the net level. A sharp increase in tax rate (up 194 basis points to 31.6 per cent) with lower other income impacted bottom line growth in the quarter. Exceptional expenses of Rs 12 crore (versus a Rs 48.7 crore exceptional credit in the year-ago period) resulted in a 2.6 per cent fall in net profit to Rs 962 crore.
However, adjusting for the exceptional items (restructuring expenses net of profit from sale of surplus properties) net profit grew 1.4 per cent year-on-year to Rs 970 crore. Even this number fell short of Bloomberg consensus estimate of Rs 1,043 crore by about eight per cent.
Amongst key segments, packaged foods as well as personal products revenues (about 30 per cent of overall revenues) clocked double-digit growth in the quarter. Here, personal products, which accounted for almost half of EBIT, witnessed healthy topline growth as well as 170 basis points expansion in EBIT margin to 26.1 per cent. Thus, its EBIT was up 17 per cent to Rs 612 crore.
On the other hand, soaps and detergents revenues grew just two per cent on account of price deflation and beverages grew six per cent. HUL's soaps and detergents segment is most impacted by falling commodity prices. This is because lower input prices enable smaller players to enter the market putting pressure on established players. In this context, the price cuts taken by HUL in this segment seems justified and is key reason for this segment growing in low single-digits in the September 2015 quarter. This segment's EBIT margin also contracted 80 basis points year-on-year to 12.8 per cent.
Most of HUL’s key brands such as Dove, Lifebuoy, Surf, Rin, Ponds, Lakme, Tresemme, Close Up,Kissan, Knorr and Kwality Walls witnessed healthy double-digit volume growth in the quarter. Pepsodent toothpaste and Pureit water purifiers, however, put up a subdued show in the quarter.
Management indicated that rural growth has come down to match urban growth levels on the back of weak monsoons and lower disposable incomes of rural consumers. While company has seen improvement in modern trade, there is uncertainty over rural growth going forward.
Harish Manwani, Chairman, HUL, said, “The deflationary commodity cost environment is likely to continue in the near term and our strategy of delivering consistent and competitive growth with sustainable improvement in operating margin remains unchanged.”
On Wednesday (results day), the HUL scrip fell 1.85 per cent to close at Rs 797.4. It fell another 0.84 per cent to Rs 790.70 on Thursday. While the stock trades at rich valuation of 37 times FY17 estimated adjusted earnings, Nitin Mathur, consumer analyst at Societe Generale believes this premium is justified. He believes improving premiumisation in certain brands is a key positive. Mathur has a Buy rating on the stock with a price target of Rs 950 per share.
Of the 50 analysts polled by Bloomberg, a third have a buy rating, 44 per cent have neutral/hold and 22 per cent have a sell rating on the stock. Their average one-year target price is Rs 878.