Stock Review: HUL

HUL disappointed again with its latest set of numbers for the quarter to December, as growing competition and cost pressures started to bite, belying hopes built over the last few quarters of an improved performance.

   The company had to absorb higher raw material expenses to sustain volume growth. And the near-term outlook is hardly rosy. Given the expectations of higher inflation and competitive pressure, there may not be much of a respite for the fast moving consumer goods, or FMCG, firm. At 11.6%, the growth in its net sales was slower than the 13% rise in volumes on a year-onyear basis. This reflects a drop in realisation, which means that the incremental growth in volumes was at the expense of lower unit cost. What this implies is that either the company was unable to pass on the input cost burden completely to end-users through price rises or that it offered more products through promotions to boost volumes.

   Input cost inflation was a major dampener. Raw material costs rose 17% — faster than sales growth, which is an indicator that the company spent more to gain additional revenue. Though advertising spends were up 17%, their proportion to sales was stable at 14%.

   What was most disappointing last quarter was the performance of its soaps & detergents business, which accounts for 43% of total net sales. Increased palm oil prices, packaging costs and high advertising and promotion spend and the inability to pass on the rising cost to the consumer has impacted profitability. With operating margins of this business sliding from 13% to 8%, its contribution to total segment profits has decreased to 23% from 35% a year ago.

   Also, the performance of its processed foods segment, which contributes 19% of total sales, was hardly impressive. This category saw a good volume growth, but being a loss-making business, this growth backfired impacting overall profitability.

   The bright spots were its other businesses – personal products, beverages and exports. After the latest quarter, the contribution to profitability of these sectors rose from 67% to 82%.

   The next few quarters are also likely to be challenging for HUL. It may not be able to respond to higher input costs through a proportionate increase in its product prices due to steep competition from its peers such as P&G, ITC, L'Oreal and others. Also, any softening of input costs may force the company to undertake price cuts to protect its market share from nimble smaller regional players snapping at the company's heels.

   What this signals is that in either of these two scenarios, HUL may not be able to enjoy a leadership premium. Further, its advertising and promotional expenses are not likely to drop any time soon in the face of rising competition. That the company is also no longer perceived as a top defensive bet even when the economic cycle changes is a reflection of the stiff challenges ahead.