Surging input costs leave a dent on Hindustan Unilever bottomline

High input costs and increased spend on advertising and promotion weighed heavy on consumer goods giant Hindustan Unilever (HUL) in the quarter ended December, beating down its net profit 1.8% year on year to Rs637.51 crore.

The company’s operating profit margin fell by a little over 3% even as advertising and promotions spend for the quarter increased 17%.

Volume growth in domestic consumer business was a healthy 13% during the quarter. However, toilet soaps and detergents — which HUL derives half its sales from — were impacted by increase in raw material prices and the company’s inability to pass on the same to consumers.

HUL said it may have to take another round of price hikes on products across categories such as toilet soaps, detergents and skin care. The maker of Rin and Wheel detergents and toilet soaps brands Lux, Lifebuoy and Dove had taken price hikes of 3-8% during the quarter ended September.

Analysts expect the company to take another round of price hikes on toilet soaps, detergents, skincare items, tea and coffee in another month’s time. The concern is also over volumes as price increases could impact consumer demand in the fourth quarter.

“There are cost pressures. It is for real. Inflation is likely to continue at high levels and competitive intensity is going to stay,” Sridhar Ramamurthy, chief financial officer, HUL said.

Prices of raw materials for the company —palm oil, which is a key component for toilet soaps, linear alkyl benzene that is used in detergents, and packaging that is used across the portfolio of products — continue to remain high.    

Palm oil prices have gone up by 50% over the past couple of quarters, while the cost of LAB and packaging have risen 20-25%.

“Obviously, the combination of cost saving and price increase has not been sufficient in December quarter in soaps and detergents materially and that has led to the margins coming down,” Sridhar said, adding that the company will take a calibrated approach towards future price hikes.

To make matters worse, HUL was, over the last two years, discounting its products by around 15-20%. And it has so far only been able to pass on two-third of the increase in price to consumers.

Total income increased to Rs5,127.71 crore from Rs4,573.23 crore last year.

The company’s home and personal care business grew 11.6%, foods by 11.3% and personal products by 20%.

Profit after tax but before exceptional items declined 2.1%.
Sridhar said categories and sub-categories like skin care, ice-creams, processed foods, tea bags and hand wash will be emerging categories for the future.

“Our focus would be to simultaneously do two things —- on the core, keep strengthening our leadership and drive growth, and on the emerging segments and channel, really invest to build them for future,” he said.