HUL tilts towards profitability as growth slows in June quarter
Hindustan Unilever Ltd’s (HUL’s) consumer goods business has become fitter, ready to capitalize when demand revives. The June quarter headline numbers show that domestic sales grew by 6% but volume growth was flat, profitability improved and pre-tax earnings growth was decent.
There are a few problems, however. Two are short-term in nature. The after-effects of demonetisation are waning but one segment—wholesalers—remains affected. In fact, it has got worse post the goods and services tax (GST), as wholesalers continue to sit on the fence, said the company. Their reluctance to register under GST is robbing HUL and other consumer goods firms of valuable revenue from rural markets.
In addition, the Canteen Stores Department (CSD) stopped purchases from June due to onset of GST, which hit sales growth, with HUL estimating that domestic sales growth could have been 8% instead of 6%. Part of that hit will continue in July as CSD has only recently resumed buying and will gradually stock up. The CSD problem should resolve by the December quarter although the wholesaler problem may take longer to resolve.
The demand situation is one that causes longer-term concern. Even now, acceleration in rural demand remains a hope and urban demand may be steady but does not seem to have improved. The effect of GST on mass consumption remains a question mark, especially if economic activity in the informal sector gets affected.
The 6% growth figure has been driven partially by price increases taken in some categories in earlier quarters, such as for soaps. Also, a focus on selling more premium products—and rural lagging urban—results in a favourable mix. That growth is good in real terms since the consumer price inflation was 3% in April and 2.2% in May.
The jump in profitability is impressive, up by 1.8 percentage points over a year ago and sequentially as well. HUL benefited from soft material costs, a decline in manpower costs, and a lowering of advertising and promotion spends as a percentage of sales.
Is this improvement in margins desirable? While higher margins are welcome, one can always wonder if this money could have been reinvested to get higher growth. Margins had improved in the March quarter as well, rising by 4.2 percentage points sequentially. The question becomes relevant as parent company Unilever Plc is on a quest to increase its margin. Is the improvement in HUL’s profitability a mere coincidence?
HUL’s management does say that India is a growing market and its focus will be on profit and growth. Also, cost savings too are responsible for better margins, it said. Probing this issue further is made difficult by the effects of one-off events such as GST. Whether HUL’s growth is being held back by a desire for a certain margin bears watching.
Profit before exceptional items and tax grew by 13.1%, which is good considering that overall revenue rose by a mere 4.9%. That’s good earnings growth given the market situation. That and ITC Ltd’s fall due to the hike in cess on cigarettes do add to the HUL stock’s attraction in the FMCG (fast-moving consumer goods) universe.