Consumer goods firm Hindustan Unilever Ltd (HUL) is fighting to regain volume growth and market share in its key categories of soaps and detergents. These two segments contribute half its domestic sales of personal and home care products, yet grew by just 0.9% in the September quarter over the year-ago period. Growth has slipped sharply from the 9% level in June. But HUL is doing everything it can by lowering prices and spending heavily on advertising and promotion. There is a base effect of high value and volume growth in fiscal 2009, which will recede from the March quarter.
Revenue from soaps and detergents barely grew during the September quarter, but overall sales of so-called fast-moving consumer goods (FMCG) grew by 7%. This was due to its most profitable segment, personal care products, growing by 13%. Skin and haircare products contributed to its growth. Foods did well too,?with sales growing 13%, mainly due to tea sales, on account of better price realizations. Thus, HUL managed to offset the low growth in soaps and detergents with higher growth in other segments. Underlying volume growth in FMCG was just 1% during the quarter, lower than the 2% growth in the June quarter.
Graphics: Yogesh Kumar / Mint
The company spent 38% more on advertising and promotions in the September quarter. Normally, that would have been enough to cripple its operating profit margins. But the benefit of lower raw material prices kicked in during this quarter. Also, it slashed other expenditure by 9% and staff costs grew only 2.8%. All this led to operating profit margins expanding up by 230 basis points (100 basis points equal 1 percentage point). Personal care products and beverages were the main contributors to margin expansion and soaps and detergents maintained margins, chiefly due to lower input costs.
HUL’s total operating income during the quarter rose by 4.6% while its operating profit grew by 23%. Higher depreciation and some non-recurring items led to net profit dropping by 22% to Rs428.5 crore. HUL’s core profits are in a good shape, but if it needs to lower prices further, or step up advertising and promotion, they may take a hit.
Moreover, two segments— beverages and personal products—are holding up performance, which cannot go on forever. A return to volume and value growth in soaps and detergents will be keenly awaited in the second half.
The share price, at Rs280, seems to have discounted all the uncertainty, with the price-to-earnings multiple at 28 times its estimated annualized fiscal 2010 earnings per share (adjusted for exceptional items). While HUL is doing the right thing, it appears that a strong recovery is still some quarters away.
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