The company clocks healthy top line growth but margins remain under stress.
Hindustan Unilever’s (HUL) growth strategy seems to be falling in place. The company managed to surprise the Street with better-than-expected numbers. However, like many other players in the fast moving consumer goods industry, HUL’s growth has been volume led, while margins have come under severe pressure.
In the fourth quarter, the company clocked revenues of Rs 4,899 crore and profit after tax of Rs 506 crore. Both are above consensus estimates. However, gross margins have fallen 315 basis points (bps) sequentially and 287 bps year-on-year. For the full year, operating margins have averaged at 12.2 per cent, and this is where the main concern lies. Analysts believe operating margins are on the lower side.
Analysts believe the company seems to be working on to a plan to battle rising raw material prices. On one hand the company has fast-tracked its rural distribution programme, on the other, it has dramatically cut its advertising and promotion spends. Sequentially, A&P spends are down 210 bps and annually these spends are down 180 bps. Since A&P spends are down, the fall in profitability has been arrested to some extent, says Kaustubh Pawaskar, research analyst at Sharekhan. However, analysts are not sure if the company plans to use this lever to mitigate cost pressures in future as well.
On the positive side, the company’s processed food business has clocked an impressive 26.6 per cent growth annually compared to 19 per cent growth in the third quarter. Detergent brands like Wheel, Rin and Surf have also grown in double digits, despite price rise.
However, analysts hope the company has a gameplan to deal with persistent pressure on profitability. While the company has undertaken price rise across categories, any more increase in well penetrated categories like shampoos and soaps will impact the demand. Given margin pressure will continue for couple of quarters at least, profitability in the first half will remain under pressure.
