Paul Polman, the Unilever CEO, is agonising about minnows eating into Hindustan Unilever?s (HUL) market share across key categories such as soaps and detergents. He now wants his most promising subsidiary to track volumes every month. Having held sway over the soaps and detergents market in India for years now, it’s but natural that HUL will yield some ground. But some of the loss is because in 2008, HUL failed to cut prices quickly enough at a time when consumers were looking for value. By the time it did so, consumers had discovered other brands and HUL had given a share of more than 500 basis points in soaps. Things are looking up though; volumes for the company’s products grew at 4.6% in the December 2009 quarter after growing at 1% and 2% respectively in the June 2009 and September 2009 quarters. Also, the slide in market shares has been arrested. But more price cuts may be called for and that together with higher ad spends, which have risen by about 500 basis points over the past year will hurt profitability in the near term. Already, in the last one year, realisations from the detergents business have dropped by about 13-14% year-on-year. The trend could continue because about three weeks back the company slashed prices of detergents. But that doesn’t matter, it’s the right strategy and it doesn’t matter that the HUL’s pre-exceptional earnings for the December 2009 quarter were flat year-on-year. Right now, it’s only the top line that matters.
India Interrupted
The current year could be one of the most volatile for equity markets in India; the Sensex, says Credit Suisse could swing wildly between 13,000 and 22,000. A possible 70% movement would make any investor skittish. But apparently volatility and the Indian market go hand in hand-since 1995, almost every year has seen a 50-60% movement in the Sensex and, in 2008, the market moved by 120%. If you’re a frequent trader, you could get taken to the cleaners. But otherwise, the Indian market has had a decent track record in recent times. Over five years the compounded returns have been a fairly satisfying 24%, in three years they’re an even more impressive 40%. Despite concerns about the fiscal deficit, raging inflation and rising interest rates, the India story still looks to be a good one. The economy should sustain a 7% GDP growth, for the next few years, with or without a stimulus. Trends in industrial production are more than encouraging —factory output accelerated to 16.8% in December 2009, albeit on a low base. And corporate earnings are bouncing back-the year-on-year growth in the PAT for Sensex stocks, in the December 2009 quarter, was 16% against 4% and 12% in the two preceding quarters. Consensus estimates suggest a 20% earnings growth for Sensex stocks in 2010-11 to Rs 1,099, valuing the Sensex currently at a PE of 14.5 times, close to the 15-year average of 14.3 times. That’s not too expensive but as always it is systematic buying every month that brings in the best returns. That?s the way to beat volatility.