 "HUL's positive volume surprise comes at a price")
Hindustan Unilever Ltd (HUL) stumped the Street with its higher-than-expected volume growth. The Street was expecting the company's volumes to rise four to five per cent but it reported a six per cent volume growth. While this might not compare with the double-digit growth seen over the previous eight quarters, the stock rose seven per cent on Monday, thanks to the "positive" surprise. The company's Q4 revenues grew 13 per cent year-on-year (y-o-y), compared to the 10 per cent in Q3. But growth has come at a price.
It's evident that incremental revenues are costing the company a lot more than it did in the past. While falling commodity prices helped the company lower prices, it had to increase advertising spends to bring volume growth. Prices of raw materials, such as palm oil and soda ash, have been falling over the last couple of quarters. HUL's operating margins expanded by 50 basis points (bps) to 15 per cent annually but margins are down 140 bps over the December 2012 quarter on higher promotions and ad spends. Sequentially, ad spends are up 35 bps. Sanjay Manyal of ICICIDirect expects operating margins to sustain at current levels on lower input costs in FY14.
Despite the "positive" numbers, the market isn't sure how the company will fare in FY14. HUL's fourth quarter numbers have to be seen in the context of what has driven the company's performance and the road ahead. To figure whether growth will sustain or not, one must look at the growth drivers in Q4. Soaps and detergents grew 13 per cent, personal care 12 per cent and beverages 18 per cent. Select brands like Surf, Rin, Dove, Lux, Lifebuoy and Vim grew in double digits. But all is not well, as personal care continues to struggle. Ritwik Rai, analyst at Kotak Securities, says personal products have registered only modest growth in revenue (up seven per cent y-o-y) and profits (up five per cent y-o-y). Weakness in this segment is a key negative.
Despite the growth in sales from both categories, profitability is down sequentially for both soaps & detergents and personal products. Falling commodity prices will also bring back smaller players into the fray, increasing competitive intensity in the soaps and detergents business. This would blur outlook on growth. Sagarika Mukherjee, analyst at SBI Caps, believes gradually all the gross margin benefits will have to be passed on to the end-consumer and, hence, she does not expect the margins to expand further. She believes it would be best to wait for the first quarter numbers to see the full impact of all promotions and offers in pulling the crowd in. Second, one will also see the deflationary effect on pricing in all categories as opposed to just soaps in Q4.
It's evident that incremental revenues are costing the company a lot more than it did in the past. While falling commodity prices helped the company lower prices, it had to increase advertising spends to bring volume growth. Prices of raw materials, such as palm oil and soda ash, have been falling over the last couple of quarters. HUL's operating margins expanded by 50 basis points (bps) to 15 per cent annually but margins are down 140 bps over the December 2012 quarter on higher promotions and ad spends. Sequentially, ad spends are up 35 bps. Sanjay Manyal of ICICIDirect expects operating margins to sustain at current levels on lower input costs in FY14.
Despite the "positive" numbers, the market isn't sure how the company will fare in FY14. HUL's fourth quarter numbers have to be seen in the context of what has driven the company's performance and the road ahead. To figure whether growth will sustain or not, one must look at the growth drivers in Q4. Soaps and detergents grew 13 per cent, personal care 12 per cent and beverages 18 per cent. Select brands like Surf, Rin, Dove, Lux, Lifebuoy and Vim grew in double digits. But all is not well, as personal care continues to struggle. Ritwik Rai, analyst at Kotak Securities, says personal products have registered only modest growth in revenue (up seven per cent y-o-y) and profits (up five per cent y-o-y). Weakness in this segment is a key negative.
Despite the growth in sales from both categories, profitability is down sequentially for both soaps & detergents and personal products. Falling commodity prices will also bring back smaller players into the fray, increasing competitive intensity in the soaps and detergents business. This would blur outlook on growth. Sagarika Mukherjee, analyst at SBI Caps, believes gradually all the gross margin benefits will have to be passed on to the end-consumer and, hence, she does not expect the margins to expand further. She believes it would be best to wait for the first quarter numbers to see the full impact of all promotions and offers in pulling the crowd in. Second, one will also see the deflationary effect on pricing in all categories as opposed to just soaps in Q4.