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Business News/ Market / Mark-to-market/  HUL delivers a growth punch in a tough market
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HUL delivers a growth punch in a tough market

HUL held back from passing on entire increase in input costs, so as to not affect demand, that seems to have worked

HUL expects the market situation to remain tough in the near term. However, it seems to be in a good position to fight the slowdown, as its size gives it an advantage over smaller competitors during this period. Photo: Pradeep Gaur/MintPremium
HUL expects the market situation to remain tough in the near term. However, it seems to be in a good position to fight the slowdown, as its size gives it an advantage over smaller competitors during this period. Photo: Pradeep Gaur/Mint

Hindustan Unilever Ltd’s (HUL’s) 6% volume growth in the June quarter is good, even if it can be partly attributed to a low base effect. In the year-ago quarter, volume growth was only 4% because it had stocked up in anticipation of a transport strike in the preceding quarter, when volumes grew by 6% . But the Street had likely factored this in its 4-5% volume growth estimate. To that extent, HUL’s ability to sustain volume growth in a declining packaged consumer goods market is positive.

The company said in a conference call that urban and rural markets continue to see slower growth but the gap between them is narrowing. The company seems to have done well for a few reasons. Prudent price hikes, successful re-launches, lower price-led competition and lower pressure on advertising are some of them.

The main takeaway of the quarter, however, was that sales growth fired on all cylinders. Sales of soaps and detergents rose by 12.9%, personal products by 14.7%, beverages by 10.5% and packaged foods by 18.7%.

In soaps and detergents, price hikes and re-launches contributed to growth. In personal care, skin care and shampoo products did well, especially with Fair & Lovely’s sales coming back to more normal sales levels, after a re-launch in the September quarter. The company said sachets did much better than larger packs in the personal care segment.

Packaged foods also stole the show. If this category continues to grow like this, it deserves to be watched. Globally, it is a key contributor to Unilever Plc’s sales but has played second fiddle to the home and personal care segment in India.

HUL did hike prices, evident from volume sales growing by 6% while price and product mix can take credit for the remaining 7% growth. The company’s sales rose by 13.2% in the June quarter. But HUL held back the urge to pass on all cost increases, as input costs had risen by 14.6%, much ahead of sales growth. That strategy has worked in its favour.

Advertising and promotion spending grew at 6.2% or less than half the rate of sales growth, while other expenses grew at a slower rate than sales did. Employee cost declined by 1.8%, partly due to writeback of provisions worth 32.4 crore. Adjusting for this, operating profit margin rose by 70 basis points (bps) to 16.6% and improved on a sequential basis by 145 bps. One basis point is 0.01%.

The increase in profitability contributed to profit before tax and exceptional items rising by 21.5%. But net profit figure grew by a much lower 4%, due to higher income from one-off factors and tax credits in the year ago quarters. The 21.5% growth figure is more representative of its performance during the quarter.

HUL expects the market situation to remain tough in the near term. However, it seems to be in a good position to fight the slowdown, as its size gives it an advantage over smaller competitors during this period. Margins, too, should do well, partly because the recovery in Fair & Lovely sales should continue to boost personal care margins for a few more quarters. If it continues to maintain sales growth, without a jump in advertising spends, that will be another boost to margins.

HUL’s relative strength in a troubling period for the packaged consumer goods market, when other companies are seeing pressure on growth, will win it favour among investors. On Monday, the stock rose by 3.7% compared with the 0.5% decline in the broader market.

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Published: 28 Jul 2014, 03:59 PM IST
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