India’s largest consumer goods manufacturer Hindustan Unilever Ltd (HUL) hasn’t had it so good in the past 10 years.
The 21.1% growth in net sales it has reported for the June quarter is the highest since at least the September quarter of 1998.
This is based on data collated by Capitaline, which doesn’t have yearly growth data prior to September 1998.
Unilever’s Indian arm has now had three successive quarters of very strong growth, averaging 19%. Volume growth during the last three quarters has averaged about 9% on a year-on-year (y-o-y) basis, which again is quite high by the company’s standards. What’s also heartening is HUL’s ability to take substantive price increases in the recent past. Last quarter, for instance, average prices of all of its products improved by about 10% y-o-y.
Going by the trend thus far, this hasn’t affected the volume growth.
But note that even this hefty price increase hasn’t been enough to offset rising cost pressures. Operating margin (excluding other income) fell by 130 basis points last quarter, which according to the company is mainly owing to a 75 basis points increase in spending on advertising and sales promotion.
But even raw material costs increased by 43 basis points as a percentage of sales. In the March quarter, they had declined by 78 basis points. Rising oil prices impact the company at three levels—the cost of vegetable oils, a key raw material, rises; packaging costs increase because of the rise in the prices of polymers; and freight costs also shoot up.
A look at the company’s segment results suggests that the impact of rising raw material costs would have been much more, but for a sharp improvement in the profitability of the export segment and a relatively low rate of increase in the losses of the water and chemicals business. Profit of the exports division jumped by more than eight times to Rs28.8 crore as the firm’s specialty exports turned profitable. The key divisions of HUL—soaps and detergents, personal products and beverages—all reported a decline in margins.
The Unilever management points out that it looks at margins on a companywide basis, where gains from some segments may be invested into some other segments.
While that’s partly true, especially with regards to investments in advertising, there’s no doubt that high input costs are straining overall margins.
The markets, however, have been enthused by the strong growth in revenues and the fact that the company has been paying steady dividends.
Coupled with the uncertainty surrounding most sectors, this has led to a sharp outperformance by HUL’s shares this year.
ABB India’s results for June quarter point to a slowdown
For electrical equipment firm ABB India Ltd, in the June quarter of last year, revenues were up 43%, net profit 51% and the order intake increased by 38%. A year later, in the quarter ended June, revenues are up 16% year-on-year, net profit has gone up 21% and the order intake has risen by 11%. That’s a clear indication of the slowdown in the firm. Interestingly, despite the rise in input prices, ABB’s Ebitda (earnings before interest, taxes, depreciation and amortization) margin has gone up to 11.7% from 11.3% in the March quarter.
That’s not all: It’s even slightly higher than the 11.7% Ebitda margin in the June quarter last year.
Although Ebitda margins were squeezed in the power products, power systems and process automation businesses compared with the year-ago period, they expanded significantly in the automation products segment. ABB’s focus on profitability is certainly paying off, but that has been offset by lower sales growth.
However, the order backlog continues to mount, increasing from Rs5,026 crore at the beginning of 2008 to Rs6,175 crore at the end of March and further to Rs6,777 crore at June-end. That’s a year’s revenues— net sales in 2007 were Rs5,930 crore.
At its current price of Rs835, the ABB stock trades at 19.5 times consensus earnings for FY09. Contrast Bharat Heavy Electricals Ltd (Bhel), which at Rs1,655 trades at 22 times consensus earnings for FY09.
A Citigroup report points out that ABB has traded at an average premium of 50% to Bhel’s valuation in the last three years and that a premium is justified given “ABB’s superior earnings growth, RoEs (returns on equity) and access to parent technology”. The market , however, is at the moment giving more weight to Bhel’s better performance in the June quarter.
Grasim’s clouded outlook
The consolidated results of Grasim Industries Ltd for the June quarter, despite a mere 9% rise in revenues and a flat net profit, were actually higher than analysts’ estimates, explaining why the stock moved up a bit in a weak market.
The positive surprise lay in cement, with strong growth in ready-mix concrete volumes with commissioning of new plants and good performance from the white cement business. Ebitda (earnings before interest, taxes, depreciation and amortization) margin for the cement segment was 30.2% against 35.5% in the year-ago period. The net result: Ebitda of Rs488 crore for the June quarter compared with Rs491 crore for the year-ago period.
The big hit in profit has come from the viscose staple fibre (VSF) business, where production had to be cut due to lack of offtake, leading to an 18% fall in sales volume, although realizations improved.
High sulphur and pulp prices led to Ebitda margins falling to 31% from 36.3% in the year-ago quarter. Ebitda in this segment fell to Rs195 crore from Rs256 crore in the year-ago period. Ironically, profit was supported in the June quarter by the sponge iron business, which the company is selling off.
Although a maintenance shutdown led to lower sales volumes, higher scrap prices improved realizations and margins were much higher. But the outlook for the company is not very bright. Grasim says that demand is expected to remain subdued in the near-term for the VSF business and margins will continue to remain under pressure.
In cement, while the firm will be commissioning 9.3 million tonnes per annum of capacity in the current quarter, thus augmenting volumes, margins are expected to remain under pressure on account of coal prices, while demand growth is likely to slow with the deceleration in growth in the economy.
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