Hindustan Lever Ltd., India’s biggest household-products maker, may raise some prices because of higher raw materials costs, and sell more in villages as incomes increase.
“It’s possible that we need to take some judicious price increases,” D. Sundaram, director of finance, said today in an interview. “Costs have really gone up both on the vegetable oil front” and for petroleum products, he said.
Hindustan Lever has raised prices of its soaps, skin creams and detergents as costs such as palm oil, an ingredient in making soaps, and linear alkyl benzene, used in producing detergents, have increased. Sales in the three months to 31 March rose at the fastest pace in five quarters as India’s economy grew at about 9% for a second successive year.
“This is the right time to pass on price increases, with higher disposable incomes,” said Dharmil Adhyaru, an analyst at Angel Broking Ltd. in Mumbai who had a “hold” rating on the stock as of 22 March. He expects profit margins to improve in this quarter.
During the first quarter, Hindustan Lever increased the price of its Surf Excel Blue 1.5-kilogramme detergent pack to Rs120 from Rs117. The price of a 45 gram pack of Lux soap was raised to Rs6 from Rs5. A 9 gram pack of Fair and Lovely cream was increased to Rs6 from Rs5.
The Mumbai-based company said on 30 April its first-quarter profit rose 13.6%, less than estimated, because sales of skin creams, shampoos and toothpaste grew at a slower pace.
“Price increases taken through 2006 and Hindustan Lever’s cost-effectiveness programs help mitigate the pressure on margins,” Sandeep Bhatia and Sunita Sachdev, analysts at UBS AG, wrote in a note to clients this week. They have a “Buy 2” rating on the stock.
Shares of Hindustan Lever, 51.4% owned by Unilever, fell Rs0.40, or 0.2%, to Rs199 at 11:12 a.m. local time on the Bombay Stock Exchange.
Prices of palm oil have risen 9.4% since 1 April in Malaysia, the biggest producer of the commodity. Raw material costs of Hindustan Lever increased 7.8% in the quarter ended 31 March from the year earlier.
The company in the first quarter spent Rs3.56 billion on advertising, or 11.2% of sales. In comparison, it spent 9% of sales in the three months ended 31 December.
Hindustan Lever seeks to promote the sales of its Surf Excel, Wheel detergents, Lifebuoy, Lux, Breeze soaps, Fair and Lovely skin creams and Pepsodent toothpastes in rural India.
“Rural areas have continued to grow because of a certain amount of improvement in agriculture,” Sundaram said. “We see a certain amount of increase in the rural markets for our products.”
The company aims to “reach 600 million consumers in 500,000 villages through 100,000 entrepreneurs by 2010,” Hindustan Lever said in its annual report for 2006. It covered 100,000 villages through 30,800 entrepreneurs at the end of 2006.
About 50% of the sales of soaps and detergents are generated in villages. Three out of 10 people living in rural areas use shampoo or skin creams, the company says on its Web site.
“There have been a lot of financial transfers happening in the rural economy, through remittances and government spending on infrastructure, as well as subsidies and support schemes and so on,” Sundaram said.
India’s economy may grow 8.5% in the year ending 31 March, matching the average pace of expansion in the previous three years.
The government plans to spend 40% more on infrastructure, including ports, power generation and roads in the year ending 31 March. The budget for the current fiscal year aims to boost loans to farmers by 18.4% and improve irrigation.
Agriculture is estimated to have grown 2.7% in the year ended 31 March, compared with an average 2.2% pace in the previous four years.