BackRural slump pushes Hindustan Unilever profit down
HUL cut prices and raised ad spending, but net profit fell 2.6% as rural incomes were hit by deficient rainfall
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Mumbai: Hindustan Unilever Ltd (HUL) on Wednesday posted a second-quarter profit that missed analysts’ estimates, as the nation’s largest maker of packaged consumer products cut prices of soaps and detergents and increased spending on advertising and promotions to stoke rural demand as a second straight year of deficit rainfall hurt rural incomes.
Net profit fell 2.62% to ₹ 962.24 crore in the three months ended 30 September from ₹ 988.16 crore in the year-ago period, the company said. Excluding a one-time gain from the sale of properties in the year earlier quarter, net profit rose 1%. Revenue rose 4.74% to ₹ 7,819.64 crore from a year earlier.
A Bloomberg poll of analysts had estimated net profit at ₹ 1,039.2 crore and sales at ₹ 8,029.6 crore.
HUL, the maker of Lux soaps and Surf detergents, and other packaged consumer goods makers are grappling with weak demand in rural areas, where rain-fed agriculture still remains a dominant source of income. A second straight year of deficient monsoon has affected crop production and depressed wages. This has, in turn, forced HUL to cut prices of some items and spend heavily on advertising.
“As far as this quarter is concerned, the business environment continued to remain challenging. Market growth has been led by volumes in a deflationary context and soft commodity prices continued in this quarter," P.B. Balaji, chief financial officer of HUL, told reporters in Mumbai after the earnings announcement.
Sales were primarily driven by a 7% increase in sales volume after the price cuts were effected in the quarter. The actual underlying volume growth was 6.5%, as there was some stocking up by distributors ahead of a transport strike in the quarter. The growth rate was marginally faster than the 6% volume growth during the June quarter. On average, the company cut prices of soaps and detergents by about 7%.
The Indian unit of Unilever spent ₹ 1,145.94 crore on advertising and promotions during the quarter, 23.7% more than what it had spent in the year-ago period.
The company, however, benefited from lower input cost. The cost of goods sold fell by 3.2 percentage points and this helped the company widen its operating profit margin by 40 basis points. One basis point is 0.01%.
Analysts were unimpressed. “This is the second quarter of earnings reported below the consensus expectations," said Dhananjay Sinha, co-head (institutional research) at Emkay Global Financial Services Ltd. The likelihood of downgrades for the stock increases as it could also miss the full-year consensus expectation, he said.
“When commodity costs fell, there were expectations that profits would increase substantially of consumer companies like HUL. This has not played out. Higher gross profits have been utilized to drive brand investments and consumers promotions in a slow market growth environment. This, combined with higher tax rate, has impacted the profit growth of HUL," said Gautam Duggad, vice-president, Motilal Oswal Securities Ltd.
Commodity costs will remain benign, but whether rural demand will pick up is yet to be determined, he said, adding that even the pickup in urban demand remains insufficient as it is yet to reach the peaks seen in 2011-2012.
The company will have to maintain its high level of spending on advertisements and promotion and price growth will be unlikely. “We expect a gradual improvement in the second half," said Duggad.
In the September quarter, the company recorded 1.63% revenue growth for its soaps and detergents portfolio; the personal products segment recorded 9.46% growth and packaged foods delivered 12.35% growth.
“The growth was broad-based," said Sanjiv Mehta, chief executive officer, HUL.
“We continue to invest behind our brands and in-market executional capabilities to drive the competitiveness of our portfolio. The deflationary commodity cost environment is likely to continue in the near term and our strategy of delivering consistent and competitive growth with sustainable improvement in operating margin remains unchanged," said Harish Manwani, chairman, HUL, in a press statement.
Smaller rival Godrej Consumer Products Ltd will announce its earnings on 24 October. It will be followed by Nestle India Ltd, Dabur India Ltd, Emami Ltd and Colgate-Palmolive (India) Ltd on 29 October.
On Wednesday, HUL shares fell 1.85% to ₹ 797.40 on the BSE, while the exchange’s benchmark Sensex lost 0.25% to 26,779.66 points.
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