Hindustan Unilever Ltd’s (HUL’s) June quarter results show a company that has regained form, with its domestic consumer business growing at a healthy 9% in volume terms. But one concern stands out: is the increase in its advertising and promotion (A&P) levels a one-time event or is it a cyclical upturn? A hit in margins in its personal products business is another worry.
On the ground, HUL is steadily whipping up profitability at its warhorse businesses of soaps and detergents. These categories—which together contribute nearly half of revenue—returned a profit margin of 12.2% in the June quarter, 89 basis points (bps) higher than the March quarter and 3 percentage points higher year-on-year (y-o-y). They are way below their 2003 levels of 24.8%, however. A basis point is 0.01%.That level may be good only for nostalgia, but the important thing for HUL is that this segment has definitively emerged from the doghouse. A combination of product price hikes and favourable raw material price trends helped performance. But its personal products category is once again under strain, as margins slipped by 2 percentage points sequentially. This could either be attributed to competition limiting price hikes, relative to input cost increases, or the effect of higher A&P.
A&P has seen a significant uptick, rising 29% y-o-y. As a percentage of sales, it rose 117 bps sequentially to 13.7%. Higher spends may have played some role in healthy volume growth, keeping at bay concerns that domestic consumer markets are seeing a slowdown. Price and product mix were an equal partner to HUL’s volume growth as domestic consumer revenue rose 18.7% to Rs5,995.6 crore.
Total net sales rose 13.7% y-o-y (overall sales growth was affected by demerger of exports business), but material costs rose just 9.4%. HUL ploughed back a significant portion of this cost savings into higher advertising. But its operating profit margins rose 70 bps sequentially, partly due to scale benefits, but also partly due to the demerger of its low-margin exports business.Also See | Quarterly Performance (PDF)
If A&P as a percentage of sales remains steady or goes higher, but sales growth remains at current levels, HUL may be hiking spends just to maintain growth. The story so far has been good. Sales growth is healthy, and margins in soaps and packaged foods have improved sequentially, though that in personal products and beverages have declined. A&P is what investors should keep an eye on, and also whether the personal products category recovers. Either of these factors could turn into a concern, with higher A&P spends being the bigger worry.
HUL’s share has fallen about 5% in a month, while the broad market is down 0.6%. Some of this could be concerns that consumer demand is getting affected by the economic scenario. Its premium valuations—the share trades at 32 times its 2012-13 estimated earnings per share as per Reuters estimates—make it more vulnerable to any risks to sales or profitability growth.
Graphic by Sarvesh Sharma/Mint
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