Mumbai: Hindustan Unilever Ltd (HUL), India’s largest packaged consumer goods maker, on Tuesday reported a 15.5% increase in net profit for the December quarter, but its share price tumbled as lower-than-expected growth in sales by volume and an increase in royalty payments to its Anglo-Dutch parent Unilever Plc. disappointed investors.
Net profit rose to Rs.871 crore in the three months ended 31 December from Rs.753.81 crore in the year-ago period. A Bloomberg poll of 25 analysts had estimated net profit of Rs.882.5 crore.
As consumers cut back on small discretionary spending on personal care products and packaged goods and beverages in the face of slower economic growth, the maker of Dove soaps and Kissan tomato ketchup saw revenue grow a tad below its own expectations and analyst estimates.
Net sales rose 10.1% to Rs.6,434 crore from Rs.5,844 crore in the year-ago period. The Bloomberg poll of analysts had forecast sales of Rs.6,619.4 crore.
“In an environment that continued to be challenging, we have delivered another quarter of broad-based growth and margin expansion,” said Harish Manwani, chairman, HUL.
But the company’s shares lost almost 5% in intra-day trading. The stock pared that loss, but still closed 2.88% lower at Rs.481.55 on BSE Ltd, while the benchmark Sensex fell 0.60% to 19,981.57 points. The BSE FMCG Index lost 1.3% to 5,741.07 points. FMCG is short for fast-moving consumer goods.
Sales were led by a price increase of 9%; volume growth, a measure of sales increasing due to number of unit packs sold, was 5%, said R. Sridhar, chief financial officer, HUL.
“We would have liked volume growth to be a per cent higher,” said Sridhar, while explaining that the pace of growth had slowed because of consumers cutting back on discretionary spending. Sridhar expected consumer spending to remain subdued for the next quarter or so.
Volume growth was lower than the September quarter’s 7%, which too was lower than the pace of increases in previous quarters at close to 9-10%.
“The 5% year-on-year volume growth is below our expectations of 6-7%,” said Abneesh Roy, associate director of institutional equities-research at Edelweiss Securities Ltd.
The 5% underlying volume growth for the domestic consumer business of HUL was the lowest in three years, said a report by analyst V. Srinivasan of brokerage house Angel Broking Ltd.
The slowdown in growth was seen in the personal products category, which grew 13% during the quarter. Among business categories, soaps and detergents grew 20%, beverages grew 18%, and packaged foods grew 8% (slower than the double-digit growth in past quarters).
“There has been a 200 bps (basis points) to 300 bps slowdown across discretionary categories,” said Sridhar at a media briefing to discuss earnings. One basis point is one-hundredth of a percentage point.
Despite higher spending on advertising and promotion and cutting prices of laundry products, the company managed to widen its profit before interest and tax (PBIT) margin for the sixth consecutive quarter in a row. The PBIT margin increased by 40 bps.
Separately, the consumer goods maker announced its board’s approval for increasing the royalty payment to its parent Unilever. The royalty will increase from 1.4% of revenue to 3.15% by fiscal 2018.
The royalty payment will be increased in a phased manner from 1 February 2013 to 31 March 2014—by 0.5% of revenue and thereafter in a range of 0.3-0.7% of revenue in each fiscal year leading up to a total estimated royalty cost increase of 1.75% of revenue, compared with existing arrangements, by March 2018.
A 0.5% increase in royalty in fiscal year 2014 means an approximately 4% impact on net profit, according to Roy of Edelweiss.
According to a January 2013 report by Edelweiss, McDonald’s Corp. also signed a new agreement with Hardcastle Restaurants Pvt. Ltd (HRPL) to increase royalty to 8% of net sales by 2020, against the current 3%.
Nestle India Ltd and Procter and Gamble India also pay royalty of between 3% and 5% of net sales, as per industry estimates.
The top 20 royalty-paying companies now remit Rs.3,601 crore in royalty payments—up from Rs.1,196 crore five years ago—according to an 11 December report by India Institutional Investors Advisory Services (IIAS), a proxy advisory firm.
In December 2009, the Centre, through Press Note 8, liberalized the payment for foreign technology collaborations and royalty fees.
An analysis of 25 Indian companies since 2007-2008 (excluding the financial year encompassing December 2009), before and after Press Note 8, revealed that the three companies with the highest royalty remittance of Rs.2,495 crore were remitting Rs.784 crore in 2007-08.