Hindustan Unilever: Volume growth uptick remains elusive

Hindustan Unilever (HUL)’s December 2015 quarter results indicate the sector’s woes are far from over, with prolonged slowdown in consumption demand both in urban and rural markets. The company’s revenues grew a mere 3.2 per cent year-on-year to Rs 7,823 crore, visibly missing the Bloomberg consensus estimate of Rs 8,090 crore. This was also HUL’s lowest revenue growth in 11 quarters. Continued price deflation in the soaps and detergent business (46 per cent of revenues) led to pressure on pricing. Discontinuation of excise duty benefits was another factor.

The company, however, passed on a large part of gross margin gains to end-users and invested the rest in advertising and promotional activities. HUL’s advertising and promotional cost as a percentage of sales has expanded sharply from 13.4 per cent in the March  quarter to 14.5 per cent in the December 2015 quarter, its highest level over the past 14 quarters. All these efforts enabled the fast-moving consumer goods giant to maintain its volume growth at six per cent, in line with Street expectations.

The results, though, reflect the extent of weakness in both rural and urban markets. Despite continuously passing on input cost gains to end-users and investing in advertising and promotional activities, HUL’s volume growth has remained in the six-seven per cent range since the March quarter. The December 2015 quarter also had the advantage of a low base, given that volumes had grown by only three per cent in the December 2014 quarter. Benign input costs aided a 72 basis points expansion in HUL’s earnings before interest, taxes, depreciation and amortisation margin to 18.3 per cent. This led to a 7.2 per cent growth in net profit (before exceptional items) to Rs 1,024 crore, largely in line with expectations of Rs 1,026 crore.

Among key segments, while soaps and detergents (Dove, Pears, Lifebuoy, Surf, etc) witnessed subdued revenue growth, personal products (Fair & Lovely, Ponds, Lakme, Dove, TRESemmé, etc) revenues were impacted by delayed winter. Oral Care (Close Up, Pepsodent), too, posted weak performance as the overall category remains under pressure. Beverages (Red Label, Taj Mahal, etc) and packaged foods (Kissan, Knorr, etc) witnessed good revenue growth as well as margin expansion in the quarter.

HUL’s management commentary continues to be cautious. The management will continue to make investments in brands and promotional activities as it chases profitable growth. In this backdrop, the HUL scrip fell 2.7 per cent to Rs 804 on Friday. It now trades at 35 times the FY17 estimated earnings at a premium to its historical average one-year forward price-to-earnings ratio of 29 times.

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