Hindustan Unilever says note ban impact fading

Consumer sentiment barometer Hindustan Unilever Ltd (HUL) on Monday said it is seeing recovery in sales that dropped after demonetization of Rs 500 and Rs 1,000 notes as it reported third-quarter results that beat street estimates.

"By the time December came, we started to see recovery building back. And these are secondary sales growth trends, that is, sales from our distributors to the outlets," said P B Balaji, chief financial officer, HUL.

Growth in the December quarter was adversely impacted due to demonetization and liquidity crunch, the company said.

Net sales growth dropped 1% year on year for the October-December quarter while profit after tax before exceptional items at Rs 919.86 crore was down 10%.

Profit after tax at Rs 1,037.93 crore increased by 7% thanks to sales of surplus properties of Rs 159 crore and expense cut of Rs 5.95 crore.

HUL's segmental performance was impacted due to reduced trade pipeline and lower consumer offtake. Sales growth for home care was up 1%, personal care was down 3%, refreshment was up 8% and foods was up 1%. "All this led to an overall domestic consumer business growth of 0%," said Balaji.

The demonetization impact, Balaji said was across three areas – consumers, channels and geographies. On the consumer front, the purchase basket size came down while the frequency of shop visits increased. "Interestingly, the premiumisation trend was sustained which was very reassuring," he said.

In the case of channels, the impact was different as most channels have started recovering post the initial stress. "The only channel that is still under stress is the large rural wholesalers. It will be fair to say that the overall the wholesale pipeline have gone lower in this situation," he said.

Calling it a mixed quarter, Balaji said the company's performance was resilient despite a challenging market.

"The domestic consumer business was flat with underlying volume growth of -4%. Performance across categories was impacted by the adverse market conditions. Operating profit margin was down 70 basis points, leading to an Ebitda growth of -5% and cost of goods sold was higher by about 60 basis points," Balaji said, adding that input costs continued to inflate, prompting the company to raise prices about 4%.

For geographies, Balaji said the recovery was co-related to the bank density. "While south and east were the least impacted, north and central were the most impacted. Compared to rural, the recovery was faster in the urban markets," he said.

Not attributing the entire decline in volume growth to demonetization, Sanjiv Mehta, CEO and managing director, HUL said despite the market situation HUL gained market share on a sequential basis without delving into the numbers.

"When the market starts picking up it doesn't necessarily lead to increase in offtake. There is also a pipeline build-up. So the trends generally get established over a couple of months. But clearly, August, September and October were much better than July. So we were seeing a recovery happening and that recovery, we believe, temporarily halted because of the liquidity crisis," he said.

On the timeframe for sales recovery, Mehta said, "It's very difficult to say even with the January numbers. That's because when the growth starts picking up, it would also be related to pipeline getting filled up. So you'll have to give us another month or two to really gauge whether the offtake has gone back to the pre-November 8, 2016, kind of growth numbers."

Competitive spends were maintained across segments with a minor decline in promotional expenses while there was no change in advertising spends. Company management expects maintain the level of advertising and promotional (A&P) spends in the fourth quarter as well.

On the distribution front, HUL has put together a sustainable coverage that it claims is working well for the business. "We would now want to expand the direct coverage and assortment and have put in place a plan for the same," said Balaji adding that the company has now pulled back the credit lines extended to the trade post demonetization.