Hindustan Lever Ltd, the country’s biggest household products maker, is likely to announce that its profit in the three months ended 31 December 2006 rose at the slowest pace in four quarters as a warmer-than-average winter cut sales of skin care creams.
Income before one-time gains and charges will probably rise 13.4% to Rs498 crore in the fourth quarter from Rs 439 crore, according to a median estimate of six analysts surveyed by Bloomberg by telephone and e-mail. Sales may have risen 12.3% to Rs3,340 crore. The Mumbai-based company is announcing its earnings on Tuesday.
Unseasonable weather cut sales of personal-care products, including skin-care creams such as Pond’s and Fair & Lovely, which account for about a fourth of the company’s revenue. Intense competition with rivals such as Procter & Gamble Co. prompted Hindustan Lever to spend more in the past year on ads for its toothpastes, soaps, detergents, teas and ice creams.
“Lower growth in personal products is expected to impact overall margins,” said Abhijeet Kundu, an analyst at Mumbai’s Prabhudas Lilladher Securities Ltd. “Skin creams are expected to grow at a slower rate due to the late onset of winter by one to one-and-a-half months.”
Kundu, who has a “market performer” rating on the stock, forecast personal products sales grew 13.1% in the quarter, compared with a 25% pace in the year-ago period.
Shares of Hindustan Lever, the Indian unit of the world’s second-largest food and detergent company, closed at Rs205.10 on the Bombay Stock Exchange, a fall of 0.32% from its close of 205.75 on Friday.
Hindustan Lever sells more of its personal-care products in the fourth quarter of the year, when winter arrives in the northern parts of India.
Colder and drier weather prompts more Indians to purchase skin-care creams and moisturizers. About 33% of Hindustan Lever’s revenue from personal-care products in 2005 came from sales in the fourth quarter. Minimum temperatures in New Delhi in the first week of December were about 4 degrees Celsius higher than the 80-year average, according to the Indian Meteorological Department.
Earnings estimates of analysts surveyed don’t include one-time gains or charges. Hindustan Lever had a one-time gain of Rs82.36 crore in the year-earlier period.
London- and Rotterdam-based Unilever, which owns about 52% of the Indian company, first started selling its Sunlight soap bars in the country in 1888. It added Lifebuoy soap seven years later and expanded the portfolio with Lux soap and utensil cleaner Vim.
Hindustan Lever, which sells its products through 6.3 million shops in 6,38,000 villages and 5,545 towns, faces competition from local units of Procter & Gamble, which started selling its Ariel detergent in India in 1991 and Tide detergent and Pantene shampoo in 2000. Other rivals include Godrej Consumer Products Ltd.
The company’s advertising spending increased 34.4% to Rs989 crore in the nine months ended 30 September 2006 over the 11.7% pace in the year-earlier period. The company spent Rs736 crore in the corresponding period in 2005.
“In a more competitive market context, that is a reality we have to build into our plans,” Hindustan Lever chairman Harish Manwani said in an interview in November.
But analysts such as Prabhudas Lilladher’s Kundu said the company might cut its advertising spend in the fourth quarter to “improve margins”.
Hindustan Lever raised the prices of some of its most popular items during the fourth quarter. The price of a 100gm pack of Lux soap increased by 7.7% to Rs14, a 100gm pack of Lifebuoy soap went up 11% to Rs10 and a 1.5kg pack of Surf Excel Blue detergent gained 3.5% to Rs117. “The price increases were to pass on raw material costs and won’t improve margins,” said Mahesh Patil, who helps manage the equivalent of $453 million at Birla Sun Life Asset Management Co.
Prices of palm oil, a key ingredient in soaps, rose to their highest in December since January 1999 on the Malaysia Derivatives Exchange in Kuala Lumpur. The country is the world’s largest producer of palm oil.
“We believe that a judicious mix of price increases and cost savings is really what we need,” Manwani said in November. “You can’t rely on neutralizing your entire costs through price increases.”
Earnings before interest, tax, depreciation and amortization margins are expected to increase by 80 basis points, Amnish Aggarwal, an analyst at Motilal Oswal Securities, wrote in a note to clients on 29 December. The margin expansion factors in soaps and detergents price increases are “partly neutralizing the impact of rise in prices of linear alkyl benzene, palm oil and media-cost inflation”.
Aggarwal has a “buy” rating on the stock.
In September, the company sold 51% of its wholly-owned unit Unilever India Shared Services Ltd to Cap Gemini SA. Hindustan Lever didn’t say how much it got from the sale. It didn’t include the payment for the stake in its third-quarter earnings.
(Pratik Parija in New Delhi contributed to this story)