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HUL’s results reflect slowing growth rates across industry

HUL’s results reflect slowing growth rates across industry
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First Published: Thu, Jul 28 2011. 11 26 PM IST
Updated: Thu, Jul 28 2011. 11 26 PM IST
Hindustan Unilever Ltd’s (HUL) June quarter earnings were largely in line with the Street expectations. Revenue rose 14.8% compared with a year ago on the back of an 8.3% volume growth in the domestic consumer care business. Volume growth was expected to come off after five successive quarters of double-digit growth. In fact, even the March quarter’s volume growth of 14% had come as a positive surprise and indicated a strong push by the company to maintain double-digit volume growth. Maintaining a similar level of growth for another quarter in the backdrop of rising inflation and a high base effect did seem like a stretch.
Even so, the reported volume growth of 8.3% seems a tad disappointing. Based on the company’s segmental results, it looks like growth has come off in the soaps and detergents segment. But as the company’s press release points out, growth in the soaps and detergents segment is still ahead of the industry. In other words, while growth has come off, this is more because of a slowdown in the industry growth rates. HUL continues to be aggressive in the market and appears to be sticking to its stance of maintaining or increasing its market share.
Also See | Volume Leverage (PDF)
Investors are evidently fond of this posture taken by the company in recent times. The company’s share price hit an all-time high late last month; even at the current levels, the stock is only about 7% lower from its high.
At times, such as in the year-ago June quarter, the company has also sacrificed margins to maintain or increase growth. In the current year’s June quarter, too, gross margins fell by almost 500 basis points from a year ago due to a sharp increase in raw material costs. But operating margins fell by less than 50 basis points owing to a sharp drop in advertising and sales promotion costs. It’s not that the company has stepped back on advertising spend; it’s just that the year-ago levels were exceptionally high. According to Motilal Oswal Securities Ltd’s earnings preview report, advertising spend in the year-ago June quarter was the highest ever for the company.
Based on the company’s segmental results, it appears that the soaps and detergents business bore the brunt of the decline in margins. The personal products business, in fact, reported a marginal increase in margins and even reported an impressive 19.4% increase in revenue.
Still, while HUL’s results reflect a steady performance, they also point to the fact that growth rates are slowing across the industry. With inflationary pressures continuing to be high, it does look like it will be a while before volume growth returns to double-digit levels.
Graphic by Sandeep Bhatnagar/Mint
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First Published: Thu, Jul 28 2011. 11 26 PM IST