Hindu-Unilever rate of growth

Raj Krishna, an economist, coined a term to express the slow rate of growth in socialist India, when the economy used to grow by around 3% every year.

Krishna, a believer in free markets, looked  at this secular growth year on year and, wanting to take a dig at Nehruvian socialism, came up with an antonym for the word secular. So, he called this slow growth, the “Hindu-rate” of growth.

Hindustan Unilever (HUL) has come to signify this slow growth over the last ten years. The results for the quarter ended March 31, 2010, go with this trend.

Sales went up by 8.5% to Rs 4,380.2 crore. Net profit grew 47.1% to Rs 581.2 crore. The net profit number was boosted by, among other things, profit on sale of properties and long-term trade investments,. In fact, after adjusting for these, profit fell by 2.35% to Rs 385.7 crore. The operating profit, or the money that a company makes through its core business, fell by 1.8% to Rs 545.2 crore.

Profits remained flat because revenues from the soaps and detergent segment fell 1.7% to Rs 1,978.4 crore. The business accounts for nearly half the company’s revenues.

The flattish sales  were primarily because rival Proctor and Gamble (P&G) became very aggressive and cut prices as well as increased gramage (more for the same price). This led to HUL also cutting prices on Rin and Surf, its primary brands in the segment.

The battle with P&G has also led to HUL increasing its advertising and promotion expenditure by 39% to Rs 626.5 crore. HUL is running a trade promotion called “Wheel of Fortune”, which has free Switzerland trips for wholesalers. The company is also offering trade discounts of 5-10% on soaps and shampoos.

The future continues to be bleak for HUL. P&G has become aggressive in India. Media reports suggest P&G is looking to launch its toothpaste brand Crest in India sometime this year. That should heat up things for Close Up, HUL’s premier toothpaste brand. The cash-rich ITC is also building businesses similar to that of HUL.

The power brand strategy HUL decided to follow 10 years back, where the focus was on 30 odd ‘Power Brands’, has flopped. The strategy prompted HUL to withdraw from a large number of small markets, offering an opportunity to many small players. Some of these new brands, like Ghadi detergent, are now seriously challenging HUL.

The stock touched an all-time high of Rs 302 in February 2000 and is currently in the Rs 230-240 range. Those who still hold HUL shares might do well to sell out and invest in other Indian FMCG stocks.