HUL keeps focus on volume growth

Hindustan Unilever Ltd (HUL) appears to be giving more priority to volume growth than to price-led revenue expansion. In the December quarter, the company’s year-on-year (y-o-y) volume growth in domestic consumer products was a healthy 9.1%, but was lower than the 9.8% seen in the September quarter. But volumes rose 10% in the March quarter, marking a shift. Of course, the change will gain credibility if it is sustained over the next few quarters.

HUL’s domestic consumer product sales jumped 20% y-o-y to Rs 5,494.6 crore in the March quarter, meaning volumes take half the credit for growth. Launches and relaunches have helped sales growth. Total revenue (including other products and other operating income) rose 16%, whereas operational expenses jumped 14%, taking its operating profit margin (OPM) up by 153 basis points y-o-y. A basis point is one-hundredth of a percentage point. HUL demerged its consumer exports business with effect from the March quarter. Therefore, comparable revenue growth would be higher, though the resulting impact on its OPM would be negligible.

How this increase was achieved offers some clues to HUL’s approach to the price-value equation. Its cost of goods sold as a percentage of sales rose, both over the year-ago quarter and on a sequential basis. That can mean it was more selective with price increases so as to not hurt demand, or it used promotions (such as free volumes) to grow sales. What higher volume growth does is it brings scale benefits. While employee costs rose 17.3% y-o-y, advertising and promotion costs rose by just 8.7%, and other expenses by 6.7%. That’s how OPM improved.

But it is down by 184 basis points sequentially, the price the company has chosen to pay to secure higher volume growth.

A look at its segment results shows that soaps and detergents did exceedingly well, with 28% y-o-y growth in sales, better than the 21% growth in the preceding quarter. But margins declined on a sequential basis, and was the main reason why overall margins were affected, as this segment contributes 49% to the total sales. Personal products growth picked up to 17%, healthier than the 13% growth seen in the previous quarter, and more importantly, profitability improved. Its foods segment, including beverages and packaged foods, reported relatively muted performances. HUL’s results show that cost pressures are continuing, more so in foods and in soaps and detergents than in personal products. But if it can seek the right mix of volume and price-led growth, its performance will become more sustainable, apart from being healthy.

The stock trades at 35 times its earnings per share, but given that profit before tax (excluding exceptional items) in the March quarter rose 31% y-o-y, that valuation is not unreasonable.

We welcome your comments at marktomarket@livemint.com

Also See

Cost pressures (PDF)

Quarterly performance (PDF)

PDF by Yogesh Kumar/Mint