Volume hurdle hits HUL where it hurts

By: | Updated: January 20, 2015 5:06 AM

With Hindustan Unilever (HUL) reporting a volume growth of just 3% year-on-year in the three months to December, it’s clear consumers...

With Hindustan Unilever (HUL) reporting a volume growth of just 3% year-on-year in the three months to December, it’s clear consumers aren’t loosening their purse strings just yet. For HUL this was the lowest growth in three quarters, suggesting that a substantial turnaround in consumer confidence hasn’t taken place yet. Analysts had estimated the volume expansion for the period at between 4% and 6%.

The FMCG major posted a 7.7% year-on-year growth in standalone revenues at R7,579.2 crore and net profit rose 17.9% y-o-y to R1,252.2 crore on the back of exceptional gains of R396.6 crore. However, the HUL stock, which had shot up to lifetime highs in 2015, ended the session at R892.80, down 5.3%.

The Indian unit of Anglo-Dutch consumer group Unilever said input costs had begun to drop following a decline in crude oil prices but added it saw only a “modest pick-up” in volumes. “Volumes have not grown despite a shift in usage from large packs to small packs,” said PB Balaji, HUL chief financial officer.

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Analysts attributed the lower volume growth in Q3FY15 to the company clearing inventories of products priced higher before taking price cuts. “Volumes should grow at 4-5% in the coming quarters,” an analyst with a foreign brokerage said.

The management indicated that pricing was likely to be weak in the coming quarters, especially for the soaps and detergent portfolio where the company has taken price cuts of 5%. “Passing on the gains from lower commodity prices is sensible given market conditions,” another analyst observed, adding that margin gains may not be as high as expected over the next year.

While there has been a pick-up in rural growth, which may remain unaffected by the lower increase in wages, the management believes it is too early to consider the recovery sustainable.

HUL’s operating performance was aided by the lower cost of goods sold as the operating margin grew by a modest 9 basis points to 16.6%.

Gross margins expanded to 49.5%. The soaps and detergent business, the segment that accounts for more than 45% of the top line, reported 6% y-o-y growth in revenues, driven by premium brands like Surf and Dove even as Wheel, the mass product, saw soft market growth.

The y-o-y growth in profit before tax and interest (Ebit) for the segment stood at 11.4%.

The high margin personal products business, which the company regards as a key focus area due to lower penetration, reported 6.5% y-o-y revenue growth. The phasing out of excise duty benefit impacted the segment growth also as the Ebit grew at a modest 3% y-o-y in the December quarter compared with 17% in the previous quarter. The delayed offset of winter also impacted the skincare portfolio of the segment, indicated the management, even as Fair and Lovely managed another quarter of double-digit volume growth.

The oral care segment meanwhile continued its dismal performance for another quarter, mainly weighed down by the Pepsodent brand even as the reduction of excise duty benefits also impacted performance.

Among the smaller business segments, while beverages maintained a healthy performance, the packaged foods segment reported a fifth consecutive quarter of double-digit growth driven by brands like Kissan and Knorr.

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