Stock Review: HUL

A third consecutive quarter of a double-digit growth in revenues, driven largely by volume growth indicates a turnaround for HUL, which has had a stunted growth from 2009 till mid-2010.

Efforts mounted by the company over the past few quarters now appear to be bearing fruit for the FMCG company. More than 50% of its product portfolio has either been relaunched or rebranded. It has in-creased its coverage to 5000 more stores — most of them in rural areas. A volume growth of 13.5% in spite of past year's high base in the face of an intense competition looks impressive. Operating profit, which rose 9%, was largely impacted due to high input cost. Selective product price increases and a calibrated adspend could not help the company boost operating profit margins. While the MNC consumer giant has successfully managed to defend its leadership across categories, the moot point is how much of this is sustainable in a high inflation scenario and growing competition from national and regional players as well as other multi-national companies.

In 2010, the company was seeking to push up volumes through price cuts and discounts on products. This year, it has changed the tack and is taking price increases on products back to year-ago levels. The company has indicated that the mix of price and volume growth is likely to change since increase in prices may put pressure on volume growth.

Investments in brands given competition and higher input cost inflation are two cost heads for FMCG firms. For HUL, addressing this ought not be tough, considering its deep pockets. It will need to adjust adspends and brand equity to pass on input costs to consumers .

However, soaps and detergents, the largest revenue-earner segment for HUL, continues to be a sore point for the company. This category is marked by competition, rising raw material prices and a slowdown in consumer demand. HUL appears to have adopted a wait and watch approach to gauge consumer behaviour in this category.
One of the few FMCG stocks to have declined since the start of 2011, HUL's stock has now fallen 9%. With its performance back on track, the company's stock, which is now trading at a price to earnings multiple of 27 and a dividend yield of 2.3%, looks attractive among FMCG stocks. The markets appear to have recognised that with the stock surging 3.5% on Monday after the results. However, given the current macro economic scenario, HUL will have to up its game to sustain this performance, if it is emerge as a favourite among investors again.