Slowdown blues for HUL

Sales growth slowest in over 3 years, adjusted net profit up 3.6%

Hindustan Unilever (HUL) on Friday reported the slowest sales growth rate in more than three years, as the country’s largest consumer goods maker disappointed the Street on almost all key financial parameters.

And, the signal for the road ahead isn’t encouraging, either. The financial result for the quarter ended June 30 underscores a warning by its parent, Unilever, that growth in emerging markets is no longer immune to the global economic weakness. “India is very much a reflection of the announcement from the parent. We are seeing a slowdown in market growth in both volume and value terms. Over the next two-three quarters, these challenges will continue,” Chief Financial Officer R Sridhar told reporters after the results.

After dropping 5.9 per cent intra-day on BSE, the company’s shares recovered a bit to close 3.38 per cent lower than their previous close at Rs 663.30.



Sales grew just seven per cent (the weakest pace since December 2009) to Rs 6,687.49 crore, compared with the corresponding period last financial year. The four per cent underlying volume growth, too, was below market estimates of about six per cent and slower than the nine per cent logged in the same period a year ago.

Sales of personal care products, such as creams and lotions, rose a mere two per cent and were dragged down by a muted show by the Fair & Lovely brand, one of the largest in HUL’s personal care portfolio. The foods business grew a low five per cent, as consumer demand waned.

The company said its adjusted net profit rose 3.6 per cent to Rs 885 crore. The actual net profit fell 23.4 per cent to Rs 1,019.25 crore, but that was because of a one-time gain of Rs 605 crore (from sale of property) in the same quarter last year.

The adjusted profit growth was driven by a 70-basis-point operating margin expansion to 15.9 per cent. Flattish raw material prices (as percentage of sales, at 39 per cent) and 180-basis-point fall in cost of goods sold (as percentage of sales) to 52.1 per cent rubbed positively on margins. This offset the pressure arising from increased advertising and sales promotion expenditure, which was up 19 basis points to 13.3 per cent.

The HUL management, however, defended the firm’s performance, saying volume growth was actually higher at five per cent during the quarter. “When adjusted for upstocking (basically, the stock built up during the LBT strike in Maharashtra during the March 2013 quarter), the real volume growth is five per cent, in line with the trend witnessed over the past two or three quarters,” Sridhar said. Given that large part of this volume growth was led by promotions and advertising, sustaining such numbers amid a weakening macroeconomic situation might be a key challenge for the company, analysts said.



The silver lining within the personal care portfolio were brands such as Ponds, Lakme and Dove, which posted double-digit rates of volume growth. Its oral care portfolio (Pepsodent and Close-Up), too, registered double-digit growth.

Sales of soaps & detergents grew 7.7 per cent to Rs 3,408 crore during the quarter and also saw a margin expansion of 71 basis points to 12.9 per cent, thanks to easing input costs.

“Palm oil, one of the largest raw materials for us, was benign during the quarter,” Sridhar said.

Beverage revenues for the quarter grew 16 per cent to Rs  757 crore, led by strong performance of mass-market brand Taaza. Bru, HUL’s packaged coffee brand, witnessed some moderation in growth, in sync with a slowing coffee market, Sridhar said.

Beverage category margins expanded 379 basis points to 18.3 per cent. Packaged foods sales grew five per cent to Rs  458 crore (driven by strong growth in the Knorr portfolio), while margins expanded 271 basis points to 8.4 per cent during the quarter.

Abneesh Roy, associate director (research), Edelweiss, says: “Muted sales growth in personal products, along with profit decline, is a big problem for HUL. This segment has been weakening from the past three quarters and is the worst hit by slowing discretionary spends. Going forward, we expect volume growth to recover due to improving rural demand. The rupee’s depreciation could put margins under pressure.”

Shares of the company have risen 31 per cent so far this year, compared with 22.9 per cent in BSE’s consumer sector index. Among the world’s top consumer product companies, HUL’s stock has the third-highest forward 12-month price-to-earnings ratio, according to Thomson Reuters Starmine data.