Friday, January 15, 2016

Hindustan Unilever: Volume growth uptick remains elusive

Hindustan Unilever (HUL)'s December 2015 quarter results indicate that the sector's woes are far from over with prolonged slowdown in consumption demand both in urban and rural markets. The company's revenues grew a mere 3.2 per cent year-on-year to Rs 7,823 crore, visibly missing Bloomberg consensus estimate of Rs 8,090 crore. This was also HUL's lowest revenue growth in the past 11 quarters at least. Continued price deflation in the soaps and detergent business (about 46 per cent of revenues) led to pressure on pricing. Discontinuation of excise duty benefits was another factor that impacted growth.

The company, however, passed on a large part of gross margin gains to end-users and invested the rest in advertising and promotional activities. HUL's advertising and promotional cost as a percentage of sales has expanded sharply from 13.4 per cent in the March 2015 quarter to 14.5 per cent in the December 2015 quarter -- its highest level over the past 14 quarters. All these efforts enabled the FMCG giant to maintain its volume growth at 6 per cent, in line with street's expectations.

The results though reflect the extent of weakness in both rural and urban markets. Despite continuously passing on input cost gains to end-users and investing in advertising and promotional activities, HUL's volume growth has remained in the 6-7 per cent range since March 2015 quarter. In fact, the December'15 quarter also had the advantage of a low base given that volumes had grown by just 3 per cent in December 2014 quarter.

Benign input costs though aided a 72 basis points expansion in HUL's EBITDA margin to 18.3 per cent. This led to a 7.2 per cent growth in net profit (before exceptional items) to Rs 1,024 crore, which was largely in-line with expectations of Rs 1,026 crore.

Among key segments, while soaps and detergents (Dove, Pears, Lifebuoy, Surf, etc) witnessed subdued revenue growth, personal products (Fair & Lovely, Ponds, Lakme, Dove, TRESemme, etc) revenues were impacted by delayed winter. Oral Care (Close Up, Pepsodent) too posted weak performance as the overall category remains under pressure. Beverages (Red Label, Taj Mahal, etc) and packaged foods (Kissan, Knorr, etc) though witnessed good revenue growth as well as margin expansion in the quarter.

HUL management commentary continues to be cautious. The management though will continue to make investments in brands and promotional activities as it chases profitable growth. In this backdrop, the HUL scrip fell 2.7 per cent to Rs 804 on Friday. It now trades at 35 times FY17 estimated earnings at a premium to its historical average one-year forward PE of 29 times.

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