In the cities, a consumer’s life post-demonetisation is back to near normal. That is one reason for Hindustan Unilever Ltd’s (HUL) 4% volume growth in the March quarter. Urban growth was a shade ahead of rural growth, the company said, and perhaps linked to that, it also managed to sell more premium products. About a year or two ago, rural growth was twice that of urban.

The home care business (detergents and dishwashing products among others) did very well. In detergents, the premium segment led growth. That may explain why home care sales rose by 7.4%, but margins expanded by 2.2 percentage points from a year ago and by 4.2 percentage points sequentially. This segment was responsible for half the incremental addition to segment profits from a year ago.

If HUL can maintain margins in home care, it will make life easier for the personal care business, which shoulders the margin load, with a 24.1% figure. Sales growth is good and margins stable in personal care (see chart). The company said the soaps business has improved as prices and costs have both stabilized (earlier quarters saw volume growth affected by price increases).

The refreshments business (tea, ice creams) did well, with sales rising by 10.5% and margins were stable over a year ago. The foods business was a miss this quarter.

HUL has played the pricing game cautiously; domestic sales increased 8% from a year ago and overall sales (including exports) rose by 6.8%. This is even as input costs rose by 6.7%. The company believes input costs will remain stable in the near term.

Now, if input costs did not really contribute to better margins, what did? HUL’s earnings before interest, tax, depreciation and amortization increased by 12.2% to Rs1,651, up one percentage point over a year ago, while sales rose by 6.8% to Rs8,100 crore. The effect of more premium product sales on the mix would have been one reason. The company also rationalized advertising and promotional spending. Employee costs fell but this was due to lower payouts and may change in future.

These were some reasons why margins improved during the quarter. Other expenses actually rose by 10.8%.

While operating profit improved, higher depreciation and lower other income eroded it. That’s why HUL’s net profit increased by only 6.2% over a year ago.

Its FY17 earnings per share rose by 8.5% to Rs20.80, meaning its shares trade at 48 times price-to-earnings. That’s expensive but so are its peers too. For now, these valuations should give reason to pause, especially with net profit growth where it is.

How does one justify these valuations?

Better volume growth performance than some of its peers, a good product mix, a brighter economic outlook in the next few years and hopes of a recovery in rural demand if the monsoon is good, are all factors that support a positive outlook. The June quarter may be a wait and watch due to disruption related to the roll-out of the goods and services tax (GST). If consumption shows a definite revival, in both rural and urban markets, and GST gives consumer goods companies such as HUL an edge, then sales and profit growth can step up to a higher level. Some of that upside is already priced in. For now, these valuations should give reason to pause, especially with net profit growth where it is