Intense competition in the fast moving consumer goods segment and move to gain market share take toll on profits.
Fast moving consumer goods (FMCG) company Hindustan Unilever Ltd (HUL) is feeling the heat of intense competition. It decided to bet on volumes to improve its market share. Due to this, profitability took a hit. Price cuts in the soaps and detergent segment, which accounts for 45 per cent of net revenues, buoyed volumes by 11 per cent in the March quarter. This was encouraging compared to the industry’s growth rate of six-nine per cent. In value terms, HUL recorded eight per cent growth over the March 2009 quarter, the highest in the last four quarters.
Analysts, however, are not quite enthused by this, as most segments saw a dip in profit margins. The company’s operating profit margins (OPM), at 12-14 per cent, remained lower than peers. The soaps and detergents segment saw a two per cent dip in value terms, and its profit margins fell 375 basis points to 12.8 per cent. Moreover, advertisement spends grew 322 basis points and accounted for 14.8 per cent of sales, which dragged down OPM by 110 basis points to 13.6 per cent compared to the year-ago period.
Steady management of employee costs and benign raw material costs made sure that profit margins were not severely hit.
HUL reported the biggest year-on-year rise of 47 per cent in net profit at Rs 581 crore during the quarter, fuelled by extraordinary income of Rs 195 crore. But, excluding the odd items, core net profit declined 23 per cent to Rs 386 crore. Going ahead, the Street expects volume growth to be sustained, as the advertisement spend continues to be high. This is because the management intends to maintain a dominant position. But, pressure on raw material prices and intense competition will keep a check on profit margins.
Analysts also reckon that the price war between HUL and P&G, which started in February 2010, has not fully shown its impact on the March quarter numbers. So, the heat is still on for the consumer major.
