Hindustan Unilever (HUL) reported sales growth of 7.1% YoY (year-on-year), lower than our estimate by about 4% and a miss to consensus by 2.6%. Volume growth came in at 11%, a tad lower than our estimate of 13%. The larger surprise was on gross margins, which expanded by 60 basis points versus our estimate of a 50 basis points contraction on the back of cost savings plans and hedging. We believe that it will be difficult to post gross margin expansion in the coming quarters, as the benefit of low cost hedges will wane. Ad spends continue to scale new highs, now at 15.7% (our estimate was 15%) and up 34% on a YoY basis. Competitive pressures has led to very heavy spends on this account to ensure that market share losses are recouped. The journey on that front is slow and laboured in spite of these heavy spends. Ebitda (earnings before interest, taxes, depreciation and amortisation) margin declined 177 basis points and Ebitda fell 5% YoY. PAT (profits after tax) before exceptional items declined 3.4%, and PAT before exceptional items and MTM (mark to market) adjustments declined 8%. In terms of the main categories, soaps and detergents could have seen an improvement in volume growth, as sales growth was positive at 2.4%, in spite of a reduction in product prices due to competitive activity. However, Ebit (earnings before
interest and taxes) declined 34% due to a reduction in product prices. Personal products sales grew 11%, largely volume-driven, but Ebit surprised to the upside, rising 25%.
The road ahead: HUL will continue to struggle to post double-digit topline growth in the coming quarters of FY11. While volume growth should hover around the 8-10% mark, this should be supported by low product prices and high A&P spends. We expect that in FY12e, competition will become a bit more rational and that this will lead to better growth. However, now that the visibility is low, and risks to our and the consensus EPS (earnings per share) estimates seem to be skewed marginally to the downside. However, HUL is facing difficulties, and growth over the immediate term is not indicative of the long-term potential. Per capita usage of FMCG products has a long way to go, and even if some marketshare losses are assumed, the growth rate is likely to be better than it is in FY11, which has mainly been caused by 15-20% price declines in the detergents category. On the positive side, the company is taking steps in the right direction in enhancing its premium offerings across categories. We believe that these long-term positives will keep the PE (price-to-earnings) multiples in the 20-25x range, averaging a little below the historical average of 25x.