Hindustan Unilever Ltd’s performance in 2010-11 would count as a feather in the cap of chairman Harish Manwani, who was recently elevated as Unilever Plc’s chief operating officer.
HUL’s recovery during the year is documented; but its annual report illustrates which categories helped achieve it and the sacrifice it made to get there.
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Soaps and detergents turned from problem children to growth drivers.
HUL’s might was visible in the detergents segment, as volumes rose by almost 20%, after a 3% fall in the previous year.
In absolute terms, it sold more detergents than it did two years ago.
Soaps also reported good, but less impressive, volume growth.
A common theme running through its home and personal care categories is high volume growth, with either falling or stable realizations.
This is despite rising raw material costs, contained by HUL’s buying skills.
In food, its tea business has been hit by a shift to loose tea (due to high prices) in the mass segment.
Volumes rose by under 1% while prices rose by 8%.
HUL appears to have got its act together in its processed foods segment, with volume growth tripling to around 30%. This could become a significant category if it can sustain high growth levels for a few more years.
But HUL’s growth did not come without a price, as growing the business took precedence over everything else. Not only did margins get affected, as seen from its interim results, but its cash flow from operations also declined in 2010-11.
HUL’s operating profit before working capital changes fell by 2%, but working capital requirements rose during the year.
Receivables and inventories increased while payables fell.
The net result was a 39% fall in its cash from operations. This is partly a base effect, as the previous year’s cash flow saw a substantial jump.
The focus on volume growth in 2010-11 could explain higher stocks with the company, and better terms to trade channels.
A fall in payables could be due to stocking up on materials to protect from an expected rise in prices, or paying upfront to get price discounts.
Since margins are under threat, a company may prefer lower costs to better credit.
At around Rs1,900 crore, HUL’s net cash from operations is still relatively healthy and adequate for its needs.
In 2011-12, HUL will be hoping that volumes will grow and so will product prices, for that can give margins a much needed boost.
Investors will be delighted if that happens.
Should HUL have to choose between volumes and margins, it will again choose volume growth. They should not forget that.
Graphic by Ahmed Raza Khan/Mint
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