Household products manufacturer Hindustan Unilever Ltd (HUL) has reported a better-than-expected 27% rise in operating profit to Rs599 crore, on the back of a mere 6% rise in sales in the March quarter. Revenues were lower than expected, pulled down by a 45% drop in exports, which according to the management is part of intentional ploy to bring down non-core exports. Domestic consumer goods sales grew by 11.8%, largely because of price increases in the past 12 months.
The company hasn’t disclosed its growth in volume terms, but analysts estimate it in low single digits. In the December quarter, volumes had grown by just 2.3%, but revenues had grown by as much as 15%.
The highlight of the quarter, of course, was the 250 basis points improvement in operating margin. One basis point is one-hundredth of a percentage point.
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Analysts at CLSA Research and Motilal Oswal Securities Ltd had estimated that margins would expand by 50-60 basis points. Much of the improvement in profitability happened in the soaps and detergents segment, where profit grew by 43.5% on the back of a 15.8% growth in revenues.
While on one hand prices of inputs such as palm oil and linear alkyl benzene corrected sharply, on the other hand the company held on to the price increases it had taken previously to counter higher input costs. This led to the disproportionate rise in profit.
But this phenomenon would be short-lived, since competitors (especially regional players) started offering laundry and personal wash alternatives at cheaper prices earlier this year. Consumers, too, were quick to shift loyalties to these cheaper brands, a process called “downtrading”. HUL has, in recent months, responded by cutting prices of products in these categories to arrest the fall in market share.
While this should result in better volume growth in coming quarters, profit margins would not increase at the same rate as in the last quarter. Needless to say, the markets are more interested in volume growth, as that would ensure long-term earnings growth. The company has suffered in the past by holding on to its premium pricing, and has been relatively quicker in responding to the “downtrading” phenomenon this time around.
Shares of HUL, meanwhile, have underperformed in the recent bear market rally, owing to high valuations on the one hand and the impact of downtrading on the other. At current levels of Rs233 each, the stock enjoys a one-year forward earnings multiple of around 21 times earnings, which seems reasonable going by the growth in earnings last quarter. But then, the company is not likely to sustain growth at similar levels in coming quarters.
Graphic by Sandeep Bhatnagar / Mint
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