The foods and refreshments segments saw some pressure on profitability, but improved profitability in the home care and personal care segments, which together account for about 76% of revenues, ensured that on aggregate the company's profitability improved.
Hindustan Unilever (HUL), the country’s largest consumer goods company, on Wednesday reported a 30% increase in profits before exceptional items of Rs 1,198 crore, a tad better than analysts’ estimates by Bloomberg of Rs 1,173 crore, during the October-December quarter. This was achieved on the back of volume growth of 11% across segments. Profit after tax, if one includes the exceptional items, stood at Rs 1,326 crore, up 28% compared to the year-ago period. Revenues during the period rose 17% for the domestic consumer businesses, though the reported total revenue growth was just 2%. This was because the revenues for the corresponding period were reported inclusive of excise as per regulatory requirements, while the revenues for the December 2017 quarter were net of GST.
Consumer Ebitda (earnings before interest, tax, depreciation and amortisation) for domestic sales stood at Rs 1,680 crore, an increase of 24% y-o-y on a comparable basis. Comparable Ebitda margin too improved by 110 basis points over October-December 2016, due to the lower cost of goods sold and the benefits of a strong savings programme, the company said. However, the company acknowledged that inflationary pressures are building up. Performance across all segments was also not necessarily robust. The foods and refreshments segments saw some pressure on profitability, but improved profitability in the home care and personal care segments, which together account for about 76% of revenues, ensured that on aggregate the company’s profitability improved.
Speaking at a news conference, Srinivas Phatak, HUL’s CFO said that the company continues to watch the movements in prices of input costs, induced by rising oil prices (derivatives of which are used in several products) and an increase in agri-product prices on rising support prices. He indicated that the company will remain agile and responsive to manage growth, and will use all levers available to offset such increases in a competitive environment, before considering any price increase.
The management said that with the changes in the GST slabs effective November 15, 2017, the company’s effort has been to ensure that the end consumer gets the entire benefit from GST rate reduction with least disruption in trade.
Phatak said, “Implementation of this change was initiated immediately and modern trade was advised to pass on benefits to consumers with immediate effect”. However, Phatak added, that due to paucity of time, the entire benefit of the November 15 GST rate reductions on some of the pipeline stocks could not be passed on to the end consumers. “An estimated value of Rs 119 crore was proactively disclosed to the CBEC (Central Board of Excise and Customs) on this count and we offered to pay this amount suo motu to the government. This amount is not recognised as revenue and is accounted as a liability as on December 31, 2017”.
On Tuesday, HUL was among a few companies that were issued a notice by Directorate General of Safeguards (DGS), for not passing on benefits of GST to consumers. Phatak further clarified that for the period November 15 to November 30, the amount was Rs 60 crore and in early December the company offered to deposit this into consumer welfare fund. “For the month of December, we estimated this amount to be Rs 59 crore. Therefore, again in early January we offered to deposit a total of Rs 119 crore for November and December in total”. “In absence of clear legal provisions on this subject, the authorities have forwarded our request to DG Safeguards. We await their guidance in the matter,” the company said in a statement.
Commenting on the advertising and promotion spends, Sanjiv Mehta, CEO and MD, HUL said it will depend on the activity that the company does. “We look at activation, innovations and then we put the money behind whatever plans we have. Whether the markets have been robust or soft, we have not shied away from investing in the market development”. This is borne out by the company’s advertising spend in the last quarter of 2017, which was up by 25% y-o-y.
Meanwhile, in terms of rural offtake, Mehta said rural growth had slowed down due to a decline in growth of rural wages. And while growth was good in the December quarter, he stopped short of calling it a trend. He preferred to watch for a couple of quarters to establish this. Meanwhile, the HUL stock didn’t show any marked movement following the results, with the stock closing 0.68% lower at Rs 1,371.85 on Wednesday. Analysts were sceptical about the company’s ability to manage the cost pressures, but they were keen to get more clarity from the management on the performance.