Competition hurts Hindustan Unilever

Hindustan Unilever, the country's largest fast-moving consumer goods company, disappointed the Street with its earnings growth in the September quarter. Slower-than-expected demand growth and an increase in competition hit the company during the quarter. The sharp decline in raw material prices, compared to last year, was estimated to boost profitability, but the company cut prices to improve demand. The company also stepped up its spending on advertising and marketing, by 24 per cent year-on-year. Analysts believe Hindustan Unilever has done this to drive volume growth.

To boost demand, the company has also passed on lower input prices to consumers. Price deflation, and the phasing out of excise duty incentives, hit the company's sales and profit growth. Net sales grew a modest 4.7 per cent to Rs 7,819 crore, with an underlying volume growth of seven per cent. It reported a growth of 1.4 per cent in its net profit (before exceptional items), against the Bloomberg estimate of Rs 1,039 crore.

Investors had built in a higher earnings trajectory, given the sharp fall in crude prices. However, the company has not managed to match those estimates. Hindustan Unilever's operating margins expanded a mere 40 basis points year-on-year, to 16.7 per cent, but declined 192 basis points sequentially. Kotak Institutional Equities said, "As we had argued after the June quarter earnings, the flow-through of raw material tailwinds to shareholder surplus has been abysmal. We saw sharp earnings upgrades and re-rating of Hindustan Unilever (and other names in the sector) on 'crude fall trade'. Earnings are sure to get cut after the second consecutive quarter of sharp miss."

The company reported healthy growth in personal care products and packaged foods categories. Packaged foods grew 12 per cent year-on-year, while personal products were up nine per cent. Soaps and detergents grew a modest two per cent. The stress of rising competition is evident from the margin performance of the soaps and detergents segment. The segment's Ebit (earnings before interest and tax) margin declined 267 basis points sequentially to 12.8 per cent during the September quarter. It is a similar story for beverages, packaged foods, and personal care. Ebit margin in the personal care segment was down 355 basis points sequentially to 26.1 per cent during the quarter. According to KR Choksey, Hindustan Unilever's results were below expectation and the growth in the quarter continued to be hit by the phasing out of excise duty incentives and price deflation, as the benefit of lower commodity costs were passed on to consumers.