HUL: Not so fast moving

The FMCG firm’s top line growth could slow down in a difficult operating environment.

Revenues at FMCG major, Hindustan Unilever (HUL), could slow down to 12-13 per cent in 2009-10, from the 18 per cent growth (annualised) expected in the 15 months to March 2009. Revenues for the year 2007 were Rs 13,717 crore. One reason for the top line losing some momentum in 2009-10 is that volumes are likely to fall in a slowing economy. Also, it would be hard for the company to take any further price increases in the key health and personal care products category; in fact, with commodity prices coming off, it may be forced to trim prices or make adjustments to stimulate consumer demand.

Already, the increase in volumes for HUL in the September 2008 quarter was lower than expected, at just seven per cent, and that too on a low base. Industry watchers say, consumers may be starting to to use slightly smaller quantities of products such as detergents. Also some amount of downtrading may be happening---the fact that Godrej Consumer has gained share in soaps in the September quarter indicates this. Godrej’s volumes, which were up 15 per cent in the September quarter, are up in October too. However, HUL retains pricing power in the key personal products category where it is focussing on high-end products and should be able to maintain volumes.

The good news is that even though revenue growth may taper off somewhat, HUL’s operating margins could improve because of lower prices of inputs, especially palm oil which has seen a sharp fall in its price which is almost at a two year low. In the September quarter, margins for soaps and detergents came off by over 250 basis points, but things should improve from here on.

Where HUL is unlikely to be able to cut back is spends on advertising and promotions especially since ITC continues to market its personal care brands. Nevertheless, it’s possible HUL could be slightly more profitable in 2009-10 than in the current year and post a better net margin too.

For 2008-09, the net profit expected to grow by about 12-13 per cent on an annualised basis over the Rs 1,770 crore posted in 2007.