Hindustan Unilever Ltd (HUL) may have surprised even itself with its performance in the March quarter. Net sales rose by 13.5% year-on-year (y-o-y) to Rs 4,899 crore, while profit before tax and exceptional items rose by 12.8% to Rs 647 crore. Its reported net profit, after adjusting for tax, exceptional items and extraordinary items, fell by 2% to Rs 569 crore.
The company’s domestic consumer sales were up by 14%, better than the December quarter’s 11% sales growth. Sales of HUL’s flagship home and personal care business rose by 13.6%, while its foods business grew at a faster rate, rising by 15.6%.
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But the real head-turner in this quarter was volume growth, at 14% y-o-y. Growth in this quarter was expected to moderate. In fiscal 2011 (FY11), HUL’s volume growth had been partly aided by a low base effect. For example, volumes had risen by 11% in the June quarter, but it was on top of a 2% growth in the year-ago period. This cushion had ended with the December quarter, as volumes had risen by 11% in the March 2010 quarter. Instead of moderating, HUL’s March quarter volume growth came in at the highest point in the fiscal.
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Could this be a turning point for HUL? If it can sustain double-digit volume growth for a few more quarters, investors may well get convinced about its competitive ability in the domestic consumer market. That ability had come into question after rising competition and uncompetitive pricing by HUL had dented sales growth, especially on the volume front.
In FY11, growth recovered after HUL took corrective actions, including product relaunches, price cuts and a strong marketing push. This aggression was also aided by Unilever Plc’s visible disappointment at its subsidiary’s lacklustre performance. Just as HUL took a long time to recover after it slowed, it may find it relatively easier to keep up the momentum, once growth recovers.
There are some risks to this premise. One, competition may become fiercer. Two worthy and large competitors, P&G Home Products Ltd and ITC Ltd, and a slew of relatively smaller ones have their eyes on a larger share of the consumer market. The other big risk is commodity price behaviour.
Even in the March quarter, input costs were a drain on profitability. HUL’s total material costs rose by 20%, compared with the sales growth of just 14%. What saved it was a better product mix and cost controls. Employee costs, and advertising and promotion costs were flat during the quarter, while other expenditure rose by 14%.
Its operating profit margin as a result fell by only about 60 basis points to 13%. One basis point is one-hundredth of a percentage point. Commodities such as crude palm oil, coffee, tea, and crude-based chemicals have all risen during FY11.
A better product mix also helped, as sales at HUL’s personal products division rose by 16%, and its segment profit rose by a much higher 34%. This division contributes to about one-third of sales and is its most profitable one. Soaps and detergents are its largest segment and contributed about 45% of sales. Its sales grew by 11%, but profit fell by 34%. Sales of beverages—tea and coffee—rose by 16% and profit rose by 26%. Better margins in personal products and beverages offset the lower profitability in soaps and detergents.
The main worry for the company is its soaps and detergents business, which continues to be an underperformer on the profitability front. Here, there appears little option for it but to wait for commodity prices to soften. Crude palm oil prices, whose derivatives are used to make soaps, have already fallen in recent months. That may bring some relief in the coming quarter.
HUL’s higher-than-expected volume growth cheered investors, who ignored the fall in its margins, and its share jumped by 3.55% to Rs 284.45 on Monday, even as the benchmark Sensex was flat. This cheer will be sustained if HUL can demonstrate that high volume growth is sustainable. Another positive trigger will be a fall in prices of its key inputs, which will turn its margin graph upwards.
Graphic by Paras Jain/Mint