HUL focuses on ‘naturals’ portfolio, reducing costs

HUL has been introducing ‘naturals’ variants of its many personal care brands in the business over the fiscal 2017-18

HUL may be catering to renewed demand for Ayurvedic products. Photo: Pradeep Gaur/Mint
HUL may be catering to renewed demand for Ayurvedic products. Photo: Pradeep Gaur/Mint

Mumbai: Growth for India’s largest packaged consumer goods maker Hindustan Unilever Ltd came evenly split from rise in volume and value even as the firm fought back depressed consumer spending from demonetisation and now lower stock taking in anticipation of the goods and services tax (GST).

HUL’s domestic consumer business grew 8% year-on-year this quarter, of which 4% came from growth in volumes. The company’s Q4 total revenue grew 6.3% year-on-year to Rs8,969 crore.

Top company executives said this volume growth was spread evenly across its business segments—home care, personal care, food and refreshments. HUL said in a press statement that its cost of inputs as a share of total sales fell 20 basis points because commodity inflation was moderate.

The primary commodities that HUL relies on are crude oil that is used for making lotions and creams in the personal care business and vegetable oils including PFAD (palm fatty acid distillate) used for making soaps.

“These had a very steep rise (in prices) that has now tapered off,” chief financial officer P.B. Balaji said in a press briefing on Wednesday. HUL had hiked prices of its soaps and detergents in the first 2 quarters of FY16-17, although the company said prices of its “personal wash” products, aka soaps, are now stable, Balaji added. “Promotional intensity is coming down as well,” he added.

The company also brought down its ad expenditure as a ratio of sales from 11.8% to 10.5% for the quarter. “In the past, our competitive advantage was that we were the biggest media buyers,” chairman Harish Manwani said. “But now we want to be about how to deliver effectiveness of a campaign using big data and analytics. The focus is on meeting objectives of a campaign as effectively as possible.”

HUL has also been introducing “naturals” variants of its many personal care brands in the business over this fiscal year. “Our strategy is simple,” managing director and chief executive officer Sanjiv Mehta said. “We are introducing naturals variants for existing brands like Tres Semme and Clinic Plus (shampoos).Then, we have our master naturals brand Lever Ayush that has now seen a full quarter of growth since its launch and we are very pleased with its performance. Finally, we have specialist brands like Indulekha (hair oil).”

Mehta added that the company is also launching an entirely new brand Citra, a face wash, which is being introduced in the market and whose advertising campaign will begin “soon”. However, he declined to share further details.

HUL may be catering to renewed demand for Ayurvedic products, in part fuelled by the success of Patanjali. However, company executives said their strategy is broader.

“’Naturals’ has different connotations,” Mehta said. “It can mean herbal, it can mean chemical free, or it can mean made from more exotic ingredients.”

However, Mehta said that the company’s oral care division remains a cause for concern. “However, we are pleased with the Lever Ayush variants we have launched in South India,” he said.

During Q4, consolidated revenue from the personal care segment grew 8% year-on-year to Rs4,075 crore, although profit before tax margins for the business remained flat.

HUL said the company is still facing depressed rural demand whose growth is lagging behind urban demand growth. The company cited two consecutive poor monsoons in 2014 and 2015, and demonetisation after a good 2016 monsoon as the main reasons why rural demand has not revived enough. “But, rural has picked up and the premium secular trend remains,” Manwani said, referring to the steady premiumization of the company’s portfolio of goods.

Citing an example of successful continued premiumization, Mehta said that growth in the detergents space came largely from growth of the company’s premium Surf Excel brand that grew “in double digits”, he said. Margins for the home care segment for Q4 increased from 8.7% to 12.4% year-on-year, and the segment posted a 11.7% growth in revenue to Rs3,004 crore.

While these objectives show HUL has pulled out of demonetisation impact, concerns will remain, especially as the date for implementing the goods and services tax draws nearer.

For FY2016-17, HUL ended with 4% increase in the domestic business and only 1% underlying volume growth.

“While 4% volume growth for the quarter is good for the optics, HUL has historically maintained at least twice that growth,” an analyst with an equities brokerage firm said, requesting anonymity.

“Wholesale is a cash based business so it is facing a lot of challenges and is clearing up its extra stock,” Balaji said. “There will be uncertainty about prices (until GST tax rates are out).” The company is anticipating destocking and “trade pipelines will thin down in the short term”, he said.

Analysts said the consumer packaged goods industry will perform patchily until there is clarity on GST rates and operations.

“Overall volume trend is on an upward (in the consumer packaged goods industry), but there are uncertainties regarding GST,” said Gopal Agrawal, chief investment officer of Tata Asset Management Ltd. “So we are seeing non uniform growth among companies in the industry.”

GST’s biggest impact will be wholesale channels, Agrawal said, as they continue to de-stock in anticipation of changing GST rates. “But it won’t have bearing on rural economy since we are expecting a good monsoon. I expect secondary sales will be better,” he said. Secondary sales refer to sales from distributors to retailers, the second rung in the consumer goods distribution chain.

Meanwhile, HUL is also looking at lower growth in its foods business that includes Kissan jams and ketchup, Annapurna atta and salt, and Knorr soups and condiments. However, the company is not worried.

“While Kissan did well, Knorr grew from a substantially larger base of a year ago, which is the effect you are seeing now,” Balaji said. “However, we are quite pleased with the performance of the segment.”

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