Hindustan Lever Ltd’s (HLL) March quarter results sorely disappointed the markets, with the stock losing almost 5% on 30 April. A similar de-rating had occurred after the announcement of HLL’s December quarter results, but that was soon remedied when investors realized that the stock had fallen too low.
But first, the results.
After adjusting for the amalgamation of Modern Foods with the company, HLL’s net sales in the March quarter rose 13.1%. That’s well above the December quarter’s growth in net sales, which, after adjusting for other amalgamations and disposals, rose a tepid 6.1%. It’s also higher than the 9.6% growth in revenues for all of 2006. Similarly, profits before interest, after these adjustments, are up 13.6% year-on-year, well above the December quarter’s operating profit growth of 11%.
Operating margins, after adjustments, were 11.9% in the March quarter, around the same as in the March quarter of last year. Margins are up year-on-year in all categories except beverages, where higher ad spend has taken a toll—profits in this segment were lower in the March 2007 quarter compared with the year-ago period, in spite of a substantial rise in revenues. Margins in soaps and detergents, however, were lower than in the December quarter.
Higher input costs, particularly the higher cost of palm oils, have squeezed margins. Also important is the much higher ad spend. However, the company has been able to raise prices of personal products and detergents to offset rising input costs.
Revenue growth has been good. On a year-on-year basis, growth has been higher in personal products, beverages and processed foods. But, revenue from soaps and detergents rose by 9.6% in the March quarter, a tad lower than the 10.1% year-on-year growth in the December quarter.
Higher ad spend hasn’t yet translated into higher volumes. Interestingly, as much as two-thirds of the revenue growth was due to higher prices, with volume growth being only a third. In 2006, volume growth contributed about half the revenue increase, the rest being contributed by price increases.
The problem for HLL is that it needs to diversify away from the mature home and personal care business into fresh areas.
The rise in revenues from the foods business is encouraging, but it’ll still be some time before the business becomes sizable. In the near term, HLL is a company whose profits after tax are growing at 13.5% but whose stock trades at around Rs200, a multiple of around 21 times estimated 2008 earnings per share. That puts the price-earnings to growth ratio well above one, which should cap the upside in the stock.