Graphics: Yogesh Kumar / Mint

The company spent 38% more on advertising and promotions in the September quarter. Normally, that would have been enough to cripple its operating profit margins. But the benefit of lower raw material prices kicked in during this quarter. Also, it slashed other expenditure by 9% and staff costs grew only 2.8%. All this led to operating profit margins expanding up by 230 basis points (100 basis points equal 1 percentage point). Personal care products and beverages were the main contributors to margin expansion and soaps and detergents maintained margins, chiefly due to lower input costs.

HUL’s total operating income during the quarter rose by 4.6% while its operating profit grew by 23%. Higher depreciation and some non-recurring items led to net profit dropping by 22% to Rs428.5 crore. HUL’s core profits are in a good shape, but if it needs to lower prices further, or step up advertising and promotion, they may take a hit.

Moreover, two segments— beverages and personal products—are holding up performance, which cannot go on forever. A return to volume and value growth in soaps and detergents will be keenly awaited in the second half.

The share price, at Rs280, seems to have discounted all the uncertainty, with the price-to-earnings multiple at 28 times its estimated annualized fiscal 2010 earnings per share (adjusted for exceptional items). While HUL is doing the right thing, it appears that a strong recovery is still some quarters away.

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