HUL holds price line, awaits input cost deflation
Larger players may have locked in to higher prices and will have to bide their time for lower raw material prices to kick in
There are a few things about Hindustan Unilever Ltd’s (HUL’s) September quarter results that catch one’s attention. One is its 5% volume growth—unchanged compared with the preceding quarter. It has not benefited from the fall in raw material prices either. But these could be transitory events. The bigger puzzle is that price-led growth seems to be taking a back seat.
Note that in the June quarter, reported volume growth was 6% but was scaled down to 5%, to adjust for a low base effect. Therefore, the reported 13.4% sales growth too should be adjusted down, but still, the September quarter’s 10.4% sales growth indicates a scanty contribution from price and mix. If we were to look at the Street’s expectations, it was volume growth of 5-6% and sales growth of 12% and beyond.
What could explain this? One reason could be resurgent competition, as players sense a recovery and jostle for early winnings. Another reason could be falling costs. Local and regional players are quicker to pass on cost benefits to customers, as their purchasing cycle is more immediate. Larger players may have locked in to higher prices and will have to bide their time for lower raw material prices to kick in. At the same time, if the price gap between them and the other players widens, they will lose market share. This has caught larger players napping in the past. HUL wants to prevent a recurrence and may be keeping prices in check.
But the silver lining is that HUL is ensuring it stays competitive. The raw material price is a timing issue, and lower costs will eventually seep into its financials. At that time, its margins will improve even if prices remain constant. There are risks, of course, such as aggressive competition in any of its key categories.
Though HUL’s strategy may be sound, in this quarter its operating profit margin declined by 80 basis points sequentially. One basis point is 0.01%. Higher input costs and higher employee costs were culprits, as was higher excise duties due to phasing out of excise benefits. HUL countered by keeping advertising and sales expenditure and other expenses under check. While its overall net sales rose by 10.6% over the year-ago quarter, its profit before tax and exceptional items rose by 16.4%, while a higher income tax provision reduced net profit growth to 8.1%.
HUL’s shares fell by 4.8% on Monday as its results seemed to have disappointed investors. The management has indicated a long road ahead for the fast moving consumer goods (FMCG) market to recover. But one can expect softer raw material prices to give HUL headroom, to either spend more on advertising and spur sales growth or let it flow to better profitability. That should make for a better second half performance. But the Street’s expectation factors in a broad recovery in FMCG demand. That still seems some time away.
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