Home / Companies / HUL’s margins seen coming under pressure

Mumbai: Competition from “spiritual" companies like Patanjali Ayurved Ltd and rising raw material prices could hurt the margins of India’s largest consumer packaged goods company by sales Hindustan Unilever Ltd (HUL) as the maker of Surf detergents and Dove bath soaps will have to keep its ad spending at an elevated level, say experts.

Nearly 45% of HUL’s portfolio is under competitive threat from Patanjali, said analysts Anand Mour and Anirudha Joshi of ICICI Securities Ltd in a report on 6 April, adding that in an inflationary environment it could impact earnings, more so if Patanjali adopts an aggressive pricing strategy.

The brokerage firm toned down its earnings estimates for HUL by 3% for financial year 2016-17 and by 7% for 2017-18. It has also downgraded its rating on HUL from “buy" to “hold".

“With increasing acceptance of Patanjali’s non-food staples like detergents, dishwash, personal care, we expect HUL to intensify advertisements spends, though we do not build in much impact on its revenue growth," said the report.

Moreover, crude oil prices are rising and is likely to result in higher prices for key raw materials like linear alkyl benzene (LAB), liquid paraffin and packaging material prices. Since January 2016, ICE Brent Crude has risen 3.92% to $38.74 a barrel, according to Bloomberg.

In January, brokerage firm India Infoline Group (IIFL) estimated that Patanjali’s rapid growth and acceptance will see the company grow its revenue to 20,000 crore by 2020, resulting in a 1-1.5% impact per year on the revenue growth for the sector.

In 2014-15, the Indian unit of Unilever Plc, which set up its first Indian subsidiary here in 1931, reported a net profit of 4,315 crore on revenue of 30,170 crore. Meanwhile, Dabur registered a net profit of 1,066 crore on revenue of 7,806 crore. Colgate, which has had operations in India since 1937, had a profit of 558 crore on revenue of 4,211.20 crore in 2014-15.

IIFL estimated that Patanjali has high market share in categories like honey (35%), ayurvedic medicine (35%) and ghee (33%). The brokerage noted that of the 25 categories that Patanjali is present, it will have at least eight categories with revenues of over 1,000 crore by 2020.

The market has already factored in the threat from Patanjali for Dabur’s portfolio. Dabur’s stock is now trading at a 26% discount to HUL, while historically it traded at a 10% discount, said the ICICI Securities report which felt that Patanjali will impact only 9% of Dabur’s portfolio and the company is already on course to report strong growth numbers for financial year 2015-16 due to revival in the juice business, improving margins of its US-based personal care business Namaste and a favourable base.

For the quarter ending 31 March, consumer companies are expected to post marginally better revenue growth numbers aided by pick-up in select categories, lower prices and low-base benefits, said Kotak Institutional Equities in an 1 April report.

Kotak estimated a 5% sales growth for HUL led by 6% volume growth. However, the brokerage expects the operating profit margin expansion to be curtailed at 90 basis points (bps) year-on-year (YoY) due to higher advertising and promotion spends.

“We model 60 bps jump YoY and higher overheads (weaker operating leverage)," said analysts Rohit Chordia, Anand Shah and Abhas Gupta in their report. One basis point is one hundredth of a percentage point.

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