Inflation, other expenses scar HUL’s profitability

Inflation, other expenses scar HUL’s profitability

A parent’s gentle rebuke can be quite the motivator. About a year ago, Paul Polman, chief executive officer of Unilever Plc, named India as one of the countries in its portfolio that had underperformed. India’s volume growth and market share performance were the sources of disappointment.

Hindustan Unilever Ltd (HUL) has focused on regaining volume growth and market share. In the December quarter, its volumes rose by 13% over the year ago period, a little under the 14% growth seen in the September quarter. But what makes this quarter’s growth more significant is the high base effect. HUL’s volume growth in the December 2009 quarter had increased to 5%, compared with 2% in the September 2009 quarter. From the March 2011 quarter onwards, reported growth is likely to moderate, as volume growth rose to 11% in the March 2010 quarter.

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Unilever is certain to be happy with HUL’s recovery, but investors were not, greeting its results with a 5.5% drop in its share price. Their concerns are very different, chiefly focused on profitability. HUL’s operating profit fell by about 9% and its operating profit margin fell by nearly 3 percentage points. There are two reasons for this. It has been lowering prices or offering volume discounts in some categories, to drive growth and market share. Thus, net sales rose by 12%, a full percentage point below volume growth. And inflation has led to its material consumption rising by 16.5%, while advertising costs and other expenditure too grew likewise.

The net result was a 3 percentage point drop in its operating profit margin. Soaps and detergents’ margins were down by nearly 6 percentage points and that of personal products by about 3 percentage points. Sales growth was up by 6% and 20%, respectively, however.

Though HUL seems to have got its act together to ensure sales grows at a healthy rate, the outlook on its margin front is still uncertain. The base effect will eventually see margins improve; sequentially, margins were down by more than half a percentage point. Inflation continues to be high and though consumer demand for its products has not been affected yet, that risk remains.

Rising input costs pose a continued threat to margins. What is needed in this environment is pricing power, which is clearly absent due to stiff competition. A quick resolution can only come from inflation coming under control.

Graphic by Ahmed Raza Khan/Mint

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