U-turn ahead?

Backed by measures like price cuts and enhanced customer propositions, HUL hopes to boost volumes and regain market share

The recent June 2009 quarter results of Hindustan Unilever (HUL) appear subdued, but point towards a revival in volume growth. While margins have improved, various measures undertaken in the last six months are showing results and have helped HUL arrest the decline or regain market shares in select categories. The numbers, however, are not very exciting in comparison to its peers. Going ahead, while HUL’s volume growth should pick up further enabling it clock healthy performance in 2009-10, below normal monsoons could play spoilsport for the FMCG industry.

June numbers: a mixed bag

At a time when many FMCG companies have reported double-digit sales and profit growth, HUL’s performance looks disappointing. However, this was partly due to its conscious decision to exit low-value exports. Says R Sridhar, CFO, HUL, “There were certain parts of the portfolio with limited value-addition like commodity exports and bulk coffee, which have been discontinued.” Notably, even as exports fell 35 per cent year-on-year to Rs 256 crore, HUL’s domestic FMCG business grew by 12.8 per cent in the June 2009 quarter. Lower exports and a dip in other operating income, restricted sales growth to 8 per cent.

The company though beat analysts’ expectations by posting better profit margins. Despite the sharp rise in advertising expenses (due to new launches in personal products, which led to a 580 bps decline in margins in that category), HUL’s EBIDTA margins were up helped by lower raw material prices and better cost efficiencies. Two other factors, namely, a decline in other income (as HUL shifted surplus cash balances to lower yielding but relatively safer instruments) and a rise in effective tax rate, impacted net profits. The higher tax rate was consequent to some of HUL’s facilities, which earlier enjoyed 100 per cent tax exemption, being now eligible to claim tax exemption on only 30 per cent of profits. Lastly, extra-ordinary items worth Rs 21 crore led to reported net profit declining nearly 3 per cent.

Signs of revival

Last year, FMCG companies had undertaken price hikes across categories due to rising input prices. This along with the impact of economic slowdown had resulted in customers down-trading in some categories. Analysts believe that HUL had hiked prices aggressively which was among reasons for the decline in its market shares With input prices trending lower in the past few months, the company has taken various measures, including price cuts, to regain market share. 

HEALTHY PROSPECTS
in Rs crore	FY09**	Q1FY10	% Chg	FY10E	% Chg #
Net sales	20,602	4,476	7.8	18,421	11.8
EBIDTA	3,040	715	12.5	2,950	21.3
EBIDTA (%)	14.8	16	68 bps	16	120 bps
Net profit *	2,522	559	6.7	2,322	15.1
EPS (Rs) *	11.6	2.6	-	10.7	15.2
PE (x)	22.2	-	-	24.1	-
** FY09 period is for 15 months ended March 2009 * Before extra-ordinary items and forex impact # change is over annualised figures of FY09 E: analyst estimates; % Chg is y-o-y Source: Company

“We are determined to regain the shares. We have taken several actions in the market place to expand our consumer franchise. For example; in personal wash, we are leveraging the power of our full portfolio. ‘Lifebuoy’ and ‘Liril’ have been relaunched with new design and enhanced consumer value through improved formulation backed by appropriate advertising and trade support. We have taken several such actions across our categories. In oral and hair care, we have seen initial positive results in the June 2009 quarter. Apart from this the measures including pricing action and enhancing value for the consumer are starting to show results,” says Sridhar.

Notably, HUL has already reported market share gains in select categories like shampoos, toothpaste and instant coffee, albeit over March 2009 quarter. However, in the soaps & detergents business, which accounts for nearly half of HUL’s sales, the gains haven’t shown up in a meaningful manner. For instance, pricing measures taken in ‘Breeze’, a mass-end soaps brand, has seen good volumes growth, while its premium-brand ‘Dove’ too, delivered strong volume growth. However, its largest soap brand ‘Lifebuoy’ as well as ‘Liril’, which were re-launched in June quarter have yet regain lost ground.

However, the company believes that the effect of the measures taken will reflect from the current quarter. Same is the case in the laundry business, where its ‘Wheel’ brand lost market share and wherein the impact of price cuts/grammage increase is expected to reflect going ahead.

On the other hand, while its beverages and ice cream businesses have done well with robust topline growth and stable margins, the foods business saw a decline in margins. In totality, analysts believe that overall volumes for HUL, which had fallen 4.2 per cent in March 2009 quarter and were up by 2 per cent in June quarter, should recover further going ahead enabling its domestic FMCG business to report healthy topline growth in the ensuing quarters. On the margin front, although input costs are down, analysts believe that HUL may increase spend on brand promotion and advertising in a bid to secure higher volume growth and market share. Thus, they don’t see any sharp rise in margins in 2009-10.

Conclusion

As the various measures implemented by HUL take effect, volume growth should pick up further and drive topline growth (unlike last fiscal when price-led growth was more prominently visible). Price-led growth could, however, be expected in foods and beverages, where input prices are ruling firm and thus, margins in these business could remain under pressure. On the whole, margins are expected to be higher by 100-120 bps and HUL is seen clocking a profit growth of about 15 per cent in 2009-10. Regarding exports, Sridhar says that broadly, most of the planned reduction in exports is over. This in turn indicates that export growth should start looking up in a few quarters.

Overall, in comparative performance, analysts believe that mid-tier FMCG companies will clock a compound annual growth rate (CAGR) of 20-30 per cent between 2008-09 and 2010-11, which is much higher than 15-20 per cent projected for the two giants (HUL and ITC). It makes sense to stick to companies expected to report relatively higher growth as valuations too (on the basis of PE/growth) look attractive.

For HUL, at Rs 256.45, the stock trades at a PE of 24 times its estimated 2009-10 earnings and leaves little room for upside (of about 10-12 per cent) in the near-term. Hence, investors can look to buy the stock on dips.