Surf’s up, not personal care products

Hindustan Unilever (HUL) disappointed the street as volume growth came in below expectations, though at Rs754 crore, net profit was up 18% year on year.

Reflecting this, the stock closed Monday down 4% even
as the broader market gained 0.6%.

“Volume growth at 9.1% was the key disappointment. We were expecting at least double-digit volume growth,” Nomura analysts Manish Jain and Anup Sudhendranath said in a report shortly after the results.

In soaps and detergents —- the largest category for the sector —- volume growth was negative, R Sridhar, chief financial officer, HUL said, attributing the fall to the overall fast moving consumer goods market growing slower, at 10%, led mostly by price increases.
In its packaged foods business, which grew 14% through brands Kissan, Knorr and Kwality Walls, Sridhar said the soups market witnessed a sharp decline in growth from 13-14% in September to 10% in the December quarter.

Net sales grew 16.4% to Rs5,852.73 crore, with the domestic consumer business growing 16.5%, home & personal care gaining 18.2% and foods businesses logging 12.7% growth.
The company said there were inflationary pressures during the quarter on account of currency depreciation.

Cost of goods sold during the quarter was higher by 140 basis points.

At 11.8% of sales, advertising and promotion (A&P) spends were down year on year, but higher sequentially.

Sridhar said the cost pressures were managed dynamically through aggressive savings programmes coupled with judicious pricing, which gave the company an improvement of 270 basis points in margins.

Analysts, however, feel this will be difficult to sustain given the challenging macro environment.

“We believe competitive intensity still remains high in several categories in which HUL operates and a sustained cut in A&P spends may lead to HUL losing market share. Also, while growth in the mature soaps and detergents category was ahead of estimates, growth in categories of the future including personal products, beverages and packaged foods growth was slower than expected,” Goldman Sachs analysts Puneet Jain and Aditya Soman wrote in a note on Monday.

The company effected price hikes in soaps and detergents during the quarter, followed by some more in January.

According to a NewsWire18 report on Monday, the company has hiked Lux and Pears soap prices by 5%.

Sridhar said modern trade is growing quite strongly and the company’s investment over the last 18 months to grow its rural infrastructure is giving positive results.

The company did a restructuring of some capacities for cost-effectiveness.

It is also looking for suitors for some of its large properties in Mumbai and Bangalore.

Sales of beverages grew 11%, personal products 14% and soaps and detergents 21%.

“We have delivered another strong quarter of competitive growth with improvement in margins. The results, delivered against a backdrop of an uncertain economic environment, are reflective of the strength of our brands, consistency in our strategy and relentless focus on execution. We will continue to manage our business dynamically to deliver competitive, profitable and sustainable growth,” said Harish Manwani, chairman, HUL.