HUL Q1 results beat analyst estimates, but GST pain seen in Q2
Mumbai: Hindustan Unilever Ltd (HUL) on Tuesday reported June quarter results that beat analyst estimates as India’s largest packaged consumer goods maker cut costs and benefited from price increases in earlier quarters.
Flat volume growth and management commentary on volatility stemming from implementation of the goods and services tax (GST) imply tough times for the sector.
The seller of Surf detergent and Kissan ketchup said profit rose 9.3% from a year ago to Rs1,283 crore in the three months to 30 June. A Bloomberg poll of 10 analysts had estimated HUL’s Q1 profit at Rs1,183.5 crore.
Sales rose 4.8% to Rs9,222 crore, also beating an estimate of Rs8,619 crore by a Bloomberg poll. The company’s domestic consumer business grew 6%, HUL said.
“There was a cautious sentiment in trade in the run-up to the GST,” said chief financial officer P.B. Balaji. “Rural markets remained challenging. Pricing action we took in Q3 (December 2016 quarter) helped (grow margins) and trade stocks were optimized.”
HUL reported flat volumes as wholesale channels reduced inventory in anticipation of GST and the military canteen stores department (CSD) ceased to take stock for at least 45 days, Balaji said.
The CSD’s moved a caused a 2% loss in volumes in the quarter, Balaji said.
The flat volume growth in the June quarter came on the back of a 4% year-on-year rise in volumes in the March quarter. The company also forecast that GST will affect earnings in the current quarter.
“Trade pipelines are very thin,” said chief executive officer Sanjiv Mehta. “There will be an impact (on earnings) since trade pipelines have shrunk.” However, he declined to comment on how quickly volumes will recover, saying it was difficult to predict a precise timeline.
Analysts said the company’s performance beat subdued expectations, even with flat volume growth.
“Even flat volume growth is good news,” said Sachin Bobade, senior analyst at equities brokerage firm Dolat Capital. “The CSD was shut for the entire month (of June) and not taking stock, which hit the company’s volumes. We will see a jump in wholesale volumes in Q3 when things begin to stabilize and numbers are reported from a lower base owing to demonetisation in the previous year’s third quarter (December 2016).”
HUL also got a shot in the arm from stable input costs during the quarter. The firm’s earnings before interest, taxes, depreciation and amortization (Ebitda) margin—an indicator of profitability—also rose 1.6 percentage points from a year ago and beat market expectations. That was owing to a 75 basis points reduction in raw material costs and lower advertisement and promotional spending as a proportion of sales.
One basis point is one-hundredth of a percentage point.
While GST might add to volatility, Mehta said rural demand will increase gradually as it recovers from two consecutive poor monsoons (during 2014 and 2015) and the prospect of a good monsoon this year that will help farmers’ incomes.
The company does not plan to raise prices of products where tax rates under the GST regime have risen significantly, Mehta said. In categories such as detergent powders, hair care products, coffee, and colour cosmetics, the tax rate has gone up.
“We expect input tax credit to help offset some of this (increased tax burden),” he said adding that the company will not increase prices of power detergents—a key revenue earner—at least in the current quarter ending September.
Stable input prices have benefited packaged consumer goods makers, and those that have strong brands will have pricing power, said Gopal Agarwal, chief investment officer (equities) at Tata Asset Management Ltd. “Also, GST is mostly reduced across consumer product categories, so I expect companies will refrain from raising prices for the next 2-3 months.”
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