Weak rural demand from two poor monsoons takes toll on HUL volumes

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Mumbai | Updated: May 10, 2016 7:26:40 AM

Hindustan Unilever (HUL) on Monday reported a net profit of Rs 1,089.59 crore for the three months to March, up 7% year-on-year...

HUL’s operating margins, at 18.5%, were up a good 130 basis points y-o-y, helped by softer prices of inputs. (Reuters)HUL’s operating margins, at 18.5%, were up a good 130 basis points y-o-y, helped by softer prices of inputs. (Reuters)

Hindustan Unilever (HUL) on Monday reported a net profit of Rs 1,089.59 crore for the three months to March, up 7% year-on-year, with volumes subdued on the back of anaemic demand in rural markets following two weak monsoons. While the company paid out a smaller amount as taxes during Q4FY16, other income during the quarter was smaller than in Q4FY15.

The FMCG major, which has been struggling to push through volumes, posted  a total income of R7,945.66 crore, up 3.5% y-o-y, reflecting the tough environment and intense competition. HUL’s operating margins, at 18.5%, were up a good 130 basis points y-o-y, helped by softer prices of inputs.

While the results met the street’s expectations, analysts were disappointed with the rather tepid rise in volumes, which at 4%, y-o-y, is the lowest in several quarters.

In Q3FY16, volumes had risen 6% y-o-y. The HUL stock lost value to close Monday’s session at `461.10, down 0.8% on a day when the Sensex rallied 460.36 points.

HUL ended 2015-16 with revenues of `31,987 crore, up 3.83% and net profits of `4,082.37 crore, down 5.4%.

Sanjeev Mehta, MD&CEO, HUL, said at a media conference, growth had been slower in rural markets than in urban areas for the first time in several years. The management believes, a good monsoon and higher spends allocated by the government for rural  regions would help the markets recover.

HUL has, over the past year, dropped prices for its soaps and detergent portfolios by 4-5% to be able to hold on to market share. The company has passed onthe lower input costs to customers. Advertising and promotion spends in Q4FY16 at 13.95% of sales rose 40 basis points y-o-y.

While HUL benefited from commodity prices remaining soft and reported a sharp increase in gross margins of 340 basis points y-o-y in Q4FY16, growth was thanks to some excise benefits being phased out. However, Mehta pointed out prices were beginning to firm up indicating that product prices would not fall if the increase in input costs continued. “Vegetable oil prices have gone up by almost 50%,” he said.

Mehta said the company was increasing focus on e-commerce and had tied-up with mom-and –pop stores for delivery.

Analysts have observed that while HUL could have used the falling input prices to boost operating profits, the company had instead chosen to use the gains to pursue its core objectives of strengthening competitive positioning,  building nascent categories, and premiuimisation.

Gr8

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