Profit shrinks on higher advertising and promotional expenses, moderating rural demand and price cuts
Consumer goods giant Hindustan Unilever (HUL) on Wednesday reported a net profit of Rs 962.24 crore for the three months to September 2015, down 2.6% over the same quarter last year, missing analysts’ estimates partly on account of higher advertising and promotional expenses. Moderating rural demand and price cuts for the soaps and detergents portfolio pressured the firm’s top line although total volumes increased at a reasonably good 6%, after adjusting for a 50 basis points impact of stocking-up ahead of a transport strike that took place in early October. The personal products portfolio turned in a good performance but the Indian arm of Anglo Dutch group Unilever missed revenue estimates. For Q2FY16, HUL reported net sales of Rs 7819.6 crore, up 4.7% y-o-y.
Even after accounting for the exceptional gain of Rs 49 crore HUL had reported last year and exceptional loss of Rs 12.41 crore in Q2FY16 on account of restructuring expenses, the earnings grew at 3.7%, below expected growth of 5%. Bloomberg consensus estimates had pegged the net profit at Rs 1,039 crore and revenues at Rs 8,030 crore.
Moreover, the earnings before interest tax, depreciation and amortisation grew just 7% yoy to Rs 1,326 crore.
While the personal products category continued its robust performance posting a double digit volume growth of 11% and a revenue growth of 9.5% y-o-y, the soaps and detergent portfolio, which has seen price cuts for the last couple quarters, witnessed a subdued volume growth of 3%. Net sales for S&D saw only a modest expansion of 1.6%. The HUL management indicated that while the price cuts carried out in the latest quarter were higher sequentially, in the first half of FY16 the company has effectively reduced prices in the S&D category by 7%.
The management attributed the pricing cuts to benign commodity prices which it is passing on to ensure HUL does not lose market share in some of the well penetrated categories. Prices have, however, been increased for some non-S&D products. “As the commodities go down as the extent that they have, it is very important for us to not lose the consumer franchise and that is why we have corrected the prices to ensure consumer remain in our brand. For S&D, if we were not to take price reduction, there will be a lot of mushrooming players that come up eating into our market share,” said Sanjiv Mehta, CMD, HUL.
The pricing strategy weighed on the segment performance, with earnings before tax and interest -(EBIT) for the S&D segment falling by 4% to R490 crore. On the other hand, the PP category reported a robust 17% y-o-y gain in the segment earnings, on the back ongoing premiumisation observed in categories like shampoos and soaps with brands like Dove and TRESemme.
According to Harsh Manwani, chairman of HUL, currently the company does not see any evidence of rural demand falling further.