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HUL: High costs eat up profits
Jan 25, 2011

Hindustan Unilever Limited has announced its 3QFY11 results. The company has reported 12.1% YoY increase in sales and 1.8% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Sales of HUL grew by 12.1% YoY during 3QFY11 on the back of strong volume growth in the domestic consumer care business.
  • Operating (EBITDA) margins fell by 3.1% during the quarter to stand at 14.1%. This comes on the back of higher raw material costs, higher advertisement costs and higher other expenditure (all as a percentage of sales).
  • Bottom line fell by 1.8% YoY during the quarter. This is due to lower operating income, higher depreciation charges and increase in effective tax rate. Bottom line could have been lower but for increase in other income and extraordinary items. When adjusted for extraordinary items, the bottom line is seen to fall by 5.2% YoY.
  • For 9mFY11, HUL's bottom line grew by 7.2% YoY while net profit margin fell by 0.3% to 11.8%. This performance comes on the back of extraordinary gains during the period. When adjusted for the extraordinary gains, bottom line fell by 5.4% YoY.


Financial performance snapshot
Rs(m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Net sales 45,732 51,277 12.1% 133,451 147,686 10.7%
Expenditure 37,857 44,027 16.3% 111,906 127,158 13.6%
Operating profit (EBDITA) 7,875 7,250 -7.9% 21,545 20,528 -4.7%
EBDITA margin (%) 17.2% 14.1%   16.1% 13.9%  
Other income 389 770 98.1% 1,197 1,960 63.7%
Interest 2 1 -68.4% 68 2 -96.9%
Depreciation 450 563 25.1% 1,337 1,652 23.5%
Profit before tax 7,812 7,456 -4.6% 21,336 20,834 -2.4%
Extraordinary inc/(exp) 445 643 44.5% (842) 1,232  
Tax 1,766 1,724 -2.4% 4,286 4,698 9.6%
Profit after tax/(loss) 6,491 6,375 -1.8% 16,208 17,368 7.2%
Net profit margin (%) 14.2% 12.4%   12.1% 11.8%  
No. of shares (m) 2,181 2,182   2,181 2,182  
Diluted earnings per share (Rs)*         10.6  
Price to earnings ratio (x)*         26.5  
*trailing twelve months

What has driven performance in 3QFY11?
  • Sales growth for HUL was volume led. The volume growth of domestic consumer business stood at over 13% YoY. Sales of Home and Personal Care business grew by 11.6% YoY while sales of foods business grew by 11.3%. The performance this quarter has been broad based with the company spending on brand building, defending its market position and relaunching several new products over the quarter.

    All round picture
    Dec quarter % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin gain/(decline) (basis points)
    Soaps and Detergents 42.8% 5.8% -39.2% 7.7% (572)
    Personal Products 32.3% 20.2% 8.4% 28.8% (313)
    Beverages 11.8% 9.3% 24.0% 16.8% 200
    Processed Foods 4.3% 18.6%   -7.2% (657)
    Ice Creams 0.9% 30.9% 0.0% -1.2% 897
    Exports 5.7% 9.7% 201.2% 7.8% 496
    Others 2.2% 15.9%   -16.6% (103)

  • Sales of soaps and detergent business which contributes 42.8% of the total revenue was up by 5.8% YoY. This was led by a record volume growth in the Rin portfolio. The company reported a strong growth in the personal products portfolio at 20.2% YoY. This performance was broad based with skin care delivering a particularly strong performance. Beverage business of the company grew by 24% YoY. This was on the back of strong double digit volume growth led by Red label. Coffee growth was also robust across conventional and instant coffee. Processed foods grew by 18% YoY while ice cream grew by 31% YoY. Pure-it water filter continues to grow strongly as a result of increase in penetration and product offering across multiple price points.

  • Operating income fell during the quarter. As a result of higher raw material costs, increase in advertisement costs and higher other expenditure operating income was down by 7.9% YoY. Raw material costs grew by 16.5% YoY while advertisement expense grew by 17.4% YoY. Other expenditure was higher by 16.7% YoY during the quarter.

  • On a segmental basis, the company saw its soaps and detergents business being affected by lowering of prices of the products and heightened competitive activity. This has resulted in the sales increasing by a muted 5.8% YoY. Moreover, increase in brand building has resulted in PBIT margins shrinking by 5.7%. Margins for the personal products category deteriorated by 3.1% during the quarter. PBIT margins for the beverage category improved by 2%. Margins for foods category stood in the red as a result of high commodity prices. For ice cream business, the company reduced its operating losses during the quarter. The loss at operating level for ‘others' business, reflecting the water filter business, was higher this quarter as a result of the company investing behind Pureit aggressively.

  • Net profit of the company fell on the back of lower operating income, higher depreciation charges and increase in effective tax rates. Effective tax rate increased by 0.5% to stand at 23.1% during the quarter.

What to expect?
At the current price of Rs 281 the stock is trading at a multiple of 20 times our estimated FY13 earnings (RPro subscribers please click here. The company delivered good volume growth. However, we are concerned about the increase in competitive intensity that the company is facing. This has driven down profitability for the company. Given this, we would advise investors to be CAUTIOUS on the stock.

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