The country’s largest consumer products company, Hindustan Unilever (HUL), on Tuesday reported a sixteen per cent rise in net profit to Rs 871 crore during the quarter ended December, much lower than the Street estimates. This was thanks to lower consumer spends, mainly in discretionary categories. The FMCG major’s volume growth was down to five per cent, from 9-10 per cent in the year-ago period. Its net sales rose 12 per cent during the quarter to Rs 6,655 crore.
A slowdown in fast moving consumer goods (FMCG) comes with a lag effect. And, while allied sectors like automobile and capital goods had begun to feel the pinch a few quarters ago, FMCG is feeling the impact now.
Signs of a slowdown had started showing in the previous quarter, when HUL’s volumes first began to slide — falling to seven per cent. Analysts and investors had overlooked that as the second quarter is generally considered weak for FMCG firms. But that hasn’t been the case this time. The company’s shares sank six per cent during late afternoon trade on the Bombay Stock Exchange (BSE) on Tuesday. But the fall was arrested later in the day and the scrip closed 2.88 per cent down at Rs 481.55 a share.
“We remain optimistic on medium to long term, but pressure on consumers’ wallet will remain in the short term,” said Chief Financial Officer R Sridhar at the company’s headquarters in Mumbai.
The Rs 1,70,000-crore FMCG industry grew at about 15 per cent in the third quarter, broadly in line with the second quarter, but down when compared to the first quarter of the current financial year. Growth in FMCG in the first quarter was around 16-17 per cent, Sridhar had said in an earlier interaction.
New royalty agreement
On HUL’s new royalty agreement, Sridhar said the higher payout would be fair price for greater access to the parent’s brands and technology. “Unilever is committed to ensuring the support in terms of new products, technology and services. The higher royalty payout is in keeping with that,” he said.
The royalty would increase in a phased manner. From February 1 to March 31, 2014, for instance, it would be 0.5 per cent higher. In subsequent years, it would rise by 0.3-0.7 percentage points a year, Sridhar said.
HUL’s shares had fallen nearly three per cent on BSE last month after Unilever had increased the rate of royalty it gets from its Indonesian subsidiary. Unilever Indonesia had agreed to sign a five-year trademark licence, technology licence and central service agreement with the parent company for 20-50 per cent of its equity. Beginning 2013, Unilever Indonesia’s royalty payout has risen to five per cent of sales from 3.5 per cent now.
While HUL's royalty payout is lower than its peers in India, as well as its Indonesian counterpart, analysts are worried its margins would be hurt. For the quarter under review, HUL’s operating profit margins were down 122 basis points, said Angel’s Srinivasan, to 13.5 per cent. A higher royalty payout was likely to worsen the matters, analysts said.
