HUL results: the focus shifts towards margins


Hindustan Unilever Ltd’s (HUL’s) volume growth has been stuck in the 6-7% range for four quarters. In the March quarter, though, it dropped to 4%. If value sales growth had slowed too, the prognosis would have been dire. Instead, its domestic business’s sales growth improved to 3.5% from 2.9% in the preceding quarter. That does not square with the deflationary narrative prevalent among packaged consumer goods’ stocks.

That brings up the question: is it possible that HUL is tired of waiting for the sleeping volume growth genie to wake up and is taking prices up where it can? Take soaps and detergents, for instance. Sales growth is up by 2.1% and profit is up by 11.6%, much higher than the December quarter’s numbers. Even in personal products, sales growth was a relatively low 2.8% but profit grew by 9.9%. In all its segments—the other two being beverages and packaged foods—profits grew ahead of sales.

Overall, HUL’s revenue rose by 3.5% while its material costs declined by 1.5% from a year ago. Advertising and promotion costs rose by 6%, lower than in previous quarters. That’s why HUL was able to post an 11.3% growth in operating profit, higher than in the preceding two quarters. That’s also resulted in a 1.3 percentage points expansion in operating profit margin from a year ago, substantial given the trying industry conditions in which it has been achieved.

All of this suggests HUL may be taking prices up selectively, or is letting some input cost savings flow to margins. There could be another factor. Since urban markets are doing relatively better compared with rural, the premium part of its portfolio may be doing well. Its statement does say premium detergents did well as did the premium parts of Pond’s and Lakme and similarly in hair care. Thus, there could be a mix effect here as well. All of this led to HUL’s profit before tax and one-time items growing by 8.6% from a year ago.

The decline in volume growth is a reminder that consumption demand continues to remain weak. Most hopes for growth in the next few quarters hinge on demand from consumers in urban areas. Forecasts of a good monsoon have brought hopes of a revival in rural demand. But that’s just one factor that affects rural incomes and it also kicks in with a lag. Rural demand is unlikely to support a revival in volume growth in the near future. Premium products may not shift the needle much on volume growth either. A price-led revival is what appears possible. If the next few quarters show a similar pattern, then we can be sure.

HUL’s share fell by 0.8% on Monday as investors fretted over the decline in volume growth. Its share is almost at the same level as a year ago, but is still expensive, trading at a price to earnings ratio of 44 times its FY16 earnings per share. That valuation may be difficult to justify unless earnings growth improves in FY17, compared with the insipid 7% growth in profit before tax and one-time items in FY16.

The writer does not own shares in the above-mentioned companies.