It’s a difficult time for companies in the home and personal care market. The market itself is seeing a slowdown in demand that is being attributed to high food inflation. The level of competition has been rising for some years, but the pace has increased in recent times. Against this backdrop, Hindustan Unilever Ltd’s (HUL) 11% volume growth is good, especially coming after a 5% volume growth in the December quarter. There is a partial impact of a low base effect, as volumes had declined by 4.2% in the March 2009 quarter. This low base effect will continue till mid-fiscal 2011.
HUL’s management said its volume growth in key categories was ahead of market growth. But in value terms, its performance was not uniform. In its largest category of soaps and detergents, sales fell 2% in the March quarter over the year-ago period due to price reductions and promotions. But it either maintained or increased market share sequentially in sub-segments. Changes to products and investments are showing results. But margins fell sharply.
In personal products, HUL has found a saviour, as sales rose 19%, with the skincare category being a key contributor. Some of this growth could be due to a more severe winter compared with last year. Here too, it had to sacrifice some of its margins to higher advertising and promotion spends. Competition in the personal care space, too, has risen considerably. Beverage sales growth was faster and margins also improved a bit in the March quarter. Other categories such as processed foods, ice creams and exports also saw smart sales growth, though their contribution to margins was relatively lower.
If this had been a normal year, HUL would have reported a sizeable jump in operating margins. Its raw material consumption in the March quarter rose only 6.6%, against an 8.2% increase in sales. A large inventory build-up is partly responsible for the lower increase in material costs, perhaps to support a product roll-out in the current quarter. It has kept a tight rein on employee salaries and other costs. But it spent 39% more on advertising to support various initiatives, though the figure was lower than the December quarter’s 66% growth. As a result, HUL’s operating profit margin fell by around 1 percentage point from a year ago.
The fall in margins may be a worry for investors but not for the company. India is a critical market for its parent, one where it has a very strong position. Even as the market grows, it would like to retain that position. In Unilever Plc chairman Paul Polman’s words, it is a market that is the focus of “disproportionate attention”. And while he believes HUL is doing the right thing, there is still much to be done. Stable raw material costs have cushioned HUL’s efforts to regain share and volume growth. Any adverse trends on that front could hit margins further.
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