The June quarter results of Hindustan Unilever Ltd evidently disappointed the markets, what with the company’s shares falling by over 8% soon after the results were announced. The company’s shares had risen by over 35% since mid-May despite concerns about the monsoon, and a correction was long overdue. The results, in that sense, have come as a reality check.
Top line growth, as usual, wasn’t exciting. Domestic sales grew by 12.8%, with underlying volume growth of about 2%. In the March quarter, volumes had declined by about 4%, and so the price cuts taken by the company earlier this year have resulted in some recovery in volumes. But, as pointed out earlier, a volume growth of 2% isn’t exciting, especially for a stock that traded at 28.5 times estimated earnings for the year till March. Even after the correction on Tuesday, valuations are at 26 times 2010 earnings.
The company improved its operating margin by 200 basis points to 16.5%, after adjusting for mark to market losses on its open foreign exchange positions. Operating profit rose by 22.3% to Rs747 crore. Data from Capitaline shows that companies such as ITC Ltd, Marico Ltd, Godrej Consumer Products Ltd and Colgate-Palmolive (India) Ltd reported an operating margin increase of between 380 basis points and 680 basis points. Godrej’s operating profit jumped by as much as 86% last quarter.
The company’s shares fell by 8% after the June quarter results of Hindustan Unilever Ltd were announced. Ahmed Raza Khan / Mint
Based on the numbers reported by competitors, the markets had assumed that Unilever too would follow suit. Needless to say, this left ample room for disappointment. Having said that, the company’s savings on the raw material front look inadequate. Raw material costs fell by just 125 basis points.
According to an analyst, the April-June quarter was when home and personal care companies should have gained the most from the drop in commodity prices. Unilever somehow doesn’t seem to have capitalized on that, even though most of its competitors have.
In the firm’s most profitable segment, personal products, margins fell by as much as 582 basis points. Margins declined, albeit at a lower rate, in most other segments including beverages, processed foods and beverages.
Within the domestic business, only the soaps and detergents segment witnessed a margin improvement of 254 basis points. One of the reasons for this is that the company has increased its advertising and sales promotion expenses by 180 basis points as a percentage of sales. But that alone doesn’t explain the drop in margins in most segments. The savings on raw material costs have simply been inadequate.
All told, it’s not that there’s something drastically wrong with Hindustan Unilever’s results. But since valuations were as high as 28.5 times, the operating profit growth of about 22% was just insufficient as far as the markets go. One must also note that the company’s current low tax rates aren’t sustainable since some of its units will come out of tax holidays within two years. Factoring this in, valuations are still way too high. With the concerns about inadequate rains and gradually rising commodity prices, valuations should correct further.
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