Hindustan Unilever Ltd (HUL) reported a revenue growth of 8.2% year-on-year (y-o-y) in line with our estimates of a 7.3% y-o-y growth. However, while reported earnings grew 47% y-o-y (aided by one-off items), recurring earnings declined by 23% y-o-y, below our estimate of a 4% y-o-y decline, affected by margin contraction (gross margin gains reinvested into higher advertising expenditure) and a higher tax rate. HUL’s revenue growth to Rs4,316 crore was largely driven by volume growth of 11% y-o-y.
However, negative value growth of about 3% (due to price cuts in detergents) dragged the revenue growth. We note that the price war between Procter and Gamble Hygiene and Health Care Ltd (P&G) and HUL started only in early February; hence, the current quarter does not fully reflect competitive pressures. However, negative value growth of about 3% y-o-y (due to price cuts/promotional offers largely in the detergents category) dragged the revenue growth.
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Overall non-durable consumer goods sales grew 7.8% y-o-y. In terms of segments, the soaps and detergents segment posted a decline of 1.9% y-o-y, while personal products posted 18.9% y-o-y growth.
At the operating level, HUL posted a weak performance, despite a fall in input costs, largely on account of a significant jump in advertising expenditure due to intense competitive pressures. In terms of reported earnings, HUL posted a growth of 47% y-o-y, largely boosted by one-off items to the tune of Rs196 crore. However, on a recurring basis, HUL reported a sharp decline of 23% y-o-y to Rs386 crore, affected due to a sharp hike in the tax rate by 2,035 basis points (bps).
HUL’s soaps and detergents segment witnessed another disappointing quarter, registering 377 bps drop in profit before interest and tax (PBIT) margins, affected by steep price cuts in the laundry segment due to the price war with P&G. However, the management indicated that volumes remained strong, aided by promotional offers, product relaunches and pricing actions. In laundry, Rin, after the steep price cuts, witnessed accelerated growth momentum and registered strong double-digit volume growth. The personal wash portfolio maintained its market share, sequentially aided by broad-based, robust growth across the premium portfolio.
The personal products segment delivered another quarter of steady performance, registering a robust growth of 18.9% y-o-y to Rs1,255 crore, partially aided by a weak base, led by strong growth in categories such as shampoo and skin care. However, in terms of profitability, the segment registered a margin contraction of 85 bps y-o-y, resulting in a 14.4% y-o-y growth in PBIT.
We expect HUL to post 10.8% compounded annual growth rate (CAGR) in its revenue over FY10-12 despite the steep price cuts, largely aided by the steady performance of its personal care and foods division, rise in detergent volume growth and modest performance of its soaps business. In terms of earnings, we expect HUL to post a weak 9% CAGR during the period, affected by the fall in margins and higher tax rate.
Graphic by Yogesh Kumar/Mint