BackHindustan Unilever running hard to stand still
Despite slashing prices and hiking advertising and promotions spending, all HUL has managed to do is stand at the same spotvolume growth has been in the 6-7% range in the past four quarters
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What can help shares of consumer staples companies turn the corner?
Consumption growth is an obvious answer. Or is it?
Consider this: Hindustan Unilever Ltd’s (HUL’s) sales in volume terms grew by 6% from a year ago, aided by a 16.4% increase in spending on advertising and promotions (A&P). But sales in value terms grew by only 3.2%, as the company cut product prices to pass on lower input costs to spur sales growth.
Despite cutting prices and hiking A&P spending, all HUL has managed to do is stand at the same spot—volume growth has been in the 6-7% range in the past four quarters. That suggests, at this point, consumption is not growing beyond a point. In fact, rural demand is slowing steadily and could even worsen if rural incomes remain under stress.
If that be the case, the medicine that can put some wind into the sales growth is small doses of inflation. But that is nowhere in sight, except for some increase visible in domestic food inflation recently.
The new year has brought a fresh round of declines in crude oil prices. Palm oil prices are sharply down over a year ago, although recent months have seen some firming up. HUL’s key inputs derive their prices from these commodities. The company has taken a stance that it will pass on lower costs so that cheaper products don’t gain an upper hand, even if it means lower improvement in profitability.
That implies declining input costs will continue to put pressure on its revenue (since prices will be cut further). Value sales growth had declined from 5.4% in the June quarter to 4.7% in the September quarter and then to 3.2% now.
HUL’s material costs fell by 2.9% over a year ago, but higher A&P spending and other expenses meant its operating profit grew by a relatively low 7.5%.
Still, operating profit margin improved by a slender 80 basis points. Profit before interest, tax and before exceptional items also rose by 8.3%.
A basis point is 0.01%.
Among its segments, sales in soaps and detergents (the focus of the price cuts) rose by only 0.8% and profit grew by a yawn-inducing 1.3%.
The second largest segment, personal products, did better, but only relatively, with sales up 5.6% and segment profit by 9.9%.
Both segments had done better in the September quarter. A realignment of its distribution channel for personal products was partly to blame for lower sales growth, said the company, and should normalize after a few quarters.
The problem is in the macro-environment, where prices are falling, but demand is not showing any significant revival.
It would appear that HUL’s stance on price cuts is perhaps giving it a bigger share of the pie. But that’s a consolation prize, at best.
What should investors do? Watch out for a bottoming out in falling commodity prices, for inflation will pick up. A strong revival in urban consumption will also help; it has improved somewhat now relative to earlier quarters.
HUL’s stance appears sensible from a longer viewpoint. If nobody knows where this long term is placed, the justification for its high current valuations becomes thin.
After all, it trades at a huge price-to-earnings multiple of 43.4 times its annualized FY16 earnings per share. On Friday, its share fell by 2.7%.
The writer does not own shares in the above-mentioned companies.
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