Thrifty shoppers keep HUL volumes capped

Hindustan Unilever Ltd (HUL) on Monday disappointed the street with smaller-than-expected 3% rise October-December quarter sales, as the sluggish economy kept urban shoppers tightfisted, sending shares down 5% on trading close.

Net profit of the leading FMCG player, however, grew 18% at Rs 1,252 crore year on year, mainly on account of exceptional gain of Rs 397 crore from sale of property.

Sanjiv Mehta, CEO and managing director, HUL, said, "In the last 12 weeks, we are seeing some volumes pick-up. But there are still many parts of the market where the volume growth is still negative for instance in urban, modern trade, large packs, popular pricing, skin cleansing, etc."

He said the company's performance (even on the topline) was impacted by nearly 120 basis points as tax holidays came to an end.

While certain segments have picked up, the company doesn't see a big recovery in volumes soon.

"The biggest pick-up has been seen in categories like homecare and beverages as well as rural markets (pick up has been faster than urban in the last 12 weeks) and general trade. Having said that, we still have to see whether all this will sustain going forward and we will have to wait another quarter or two to figure that out," he said.

While domestic consumer business grew 8%, the volumes growth was 3% -- both ahead of the market growth. Operating profit (PBIT) was up 8% at Rs 1,258 crore and margins expanded 10 bps. The cost of goods sold was lower by 120 bps, driven by lower commodity costs and savings.HUL's 60% of sales are in urban areas. During the quarter, rural sales were high but were mostly in low-priced small packs and sachets.

In order to stay competitive, the company passed on input costs correction, including oil prices, in the range of of 5% to 10% (in specific markets, categories, price point packs etc) in categories of laundry and skin cleansing.
"We don't want to lose our consumer base and remain competitive. While that should – in theory – result in volumes picking up but the price increase will wear off and in some categories there will negative price increase because that's how the market is shaping up.

"Hopefully, with the confidence and economy picking up we should start seeing a broad base volume pick-up. For example, personal products have not seen a value pick-up in the last 12 weeks. Even the volumes are still very muted and more or less negligible growth as far as segment is concerned," Mehta said.

The company said it maintained competitive spends across all categories, and on absolute basis advertising and promotional (A&P) expenses were up Rs 48 crore, but down 30 bps as percentage of sales.

On the recent repo rate cuts announced by the RBI, Mehta said that the development will be good for the FMCG sector if it gets into the virtuous spiral of kicking off the economy. "More investments coming in will lead to more jobs and people will have more money to spend and that's when the consumer demand will start moving up. The important bit to understand here is that when a rate cut happens, where does the consumer spend his money.

"If a new two-wheeler or a superior LED television (before the world cup starts) is bought then the money will not flow into FMCG products," he said adding that it will all depend on how the spending pattern takes shape.