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HUL: Pricing power comes handy

Jan 27, 2009

Performance summary
  • Topline grows 17% YoY during 4QCY08 and 19.2% YoY during the 12 month period.
  • During 4QFY08, the operating margins increase by 0.8% YoY on account of lower ad, staff and other expenses.
  • Excluding the extraordinary items, the profits during the quarter are higher by 29% YoY.
  • The company has adopted a change in the accounting year and will follow the financial year (April to March) rather than the calendar year. Hence, although the CY08 results are comparable with that of CY07, the same are not for the full accounting year.

Standalone financials
(Rs m) 4QCY07 4QCY08 % change CY07 CY08 % change
Net sales 36,874 43,077 16.8% 137,178 163,452 19.2%
Expenditure 31,242 36,147 15.7% 118,387 142,165 20.1%
Operating profit (EBDITA) 5,632 6,931 23.1% 18,791 21,287 13.3%
EBDITA margin (%) 15.3% 16.1% 13.7% 13.0%
Other income 1020 710 -30.4% 1,937 3,152 62.8%
Interest (421) (292) -30.8% (2,124) (1,622) -23.6%
Depreciation 369 406 10.0% 1,384 1,541 11.3%
Profit before tax 6,704 7,526 12.3% 21,467 24,520 14.2%
Extraordinary item 1,178 (468)   2,261 825 -63.5%
Tax 1568 901 -42.5% 4,470 4,330 -3.1%
Profit after tax/(loss) 6,314 6,158 -2.5% 19,258 21,015 9.1%
Net profit margin (%) 17.1% 14.3%   14.0% 12.9%  
No. of shares (m) 2177.5 2179.5   2177.5 2179.5  
Diluted earnings per share (Rs)*         9.64  
Price to earnings ratio (x)*         25.4  
* On a 12-month trailing basis

What has driven performance in 4QCY08?
  • HUL reported a topline growth of17% YoY during 4QCY08 and 19.2% YoY during the 12 month period. During the quarter, FMCG grew by 21.2% YoY while the foods segment reported a strong growth of 23.5% YoY. However, exports were lower by 23% YoY from non-core and commodity segments. The overall volume growth stood merely at 2.3% YoY in 4QCY08 (8% YoY in 4QCY07) on account of price hikes taken on almost the entire range of HUL products. Infact in the main segment of soaps and detergents, the sharp price hikes and reduction in pack sizes led to a 2% to 3% volume decline. The HPC business (home and personal care) grew 21% YoY driven by price hikes and all round volume growth in personal products. Foods business also saw strong performance across the beverages, processed foods and ice-cream segments. The ‘Pure-It’ water business now has a national footprint with availability across more than 700 towns.

  • During 4QCY08, HUL witnessed a 0.8% YoY increase in operating margins on account of lower advertisement, staff and other expenses. However, raw material costs increased by 22% YoY. Price hikes and cost savings helped offset most of cost inflation. During the 12 month period, the margins declined by 0.7%. The margins are currently in line with our estimates. While the softening of input prices may bring in some relief, in a scenario of slowing growth, this may not aid margins, and may have to be passed on to consumers in the coming months. As consumer demand slows down, in order to stimulate growth, price reductions would be on cards to avoid downgrading to cheaper brands.

  • On the PBIT front, except for personal care and others, all the segments witnessed pressure. The company faced PBIT losses in the food and ice cream segments as compared to profits last year. Despite input cost pressures HUL witnessed a marginal 0.2% decline in soaps and detergent margins. Its peer, Godrej Consumers saw a sharp reduction in margins in this segment. Hence, HUL has done well on this front, indicating improvement in product mix and superior brand and pricing power of the company. Higher ad spends on the ‘Knorr’ brand has affected the margins of the food segment. For 12 month period, other than foods and ice cream segment, all other segments have witnessed growth in profits.

    All round picture..
      % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin (decline)/gain
    (basis points)
    Soaps and Detergents 48.6% 24.9% 23.6% 16.5% -20
    Personal Products 27.3% 11.3% 11.6% 32.8% 10
    Beverages 11.7% 23.9% 6.8% 12.8% -200
    Foods (includes Oils and Fats, Culinary and Branded Staples ) 3.9% 17.9% -141.2% -2.3% (880)
    Ice Creams 0.8% 15.9% -398.9% -8.3% (1,150)
    Exports 6.1% -23.1% -35.0% 5.8% (110)
    Others (includes Chemicals, Agri, Plantations etc) 1.7% 9.1% -2.9% -34.5% 430

  • Excluding the extraordinary items, (profit on sale of properties , changes in actuarial assumptions in valuation of long term employee benefits, restructuring costs, provision for diminution in the value of investment and write down of advances in a subsidiary company), the profits during the quarter are higher by 29% YoY. For the 12 month period, the profits are higher by 19% YoY. Stable margins and lower tax expenses led to the jump.

What to expect?
At the current price of Rs 244, the stock is trading at 21 times our CY10 estimates. The company has done well during the quarter. While CY08 had witnessed price led growth, the coming year is expected to be volume driven as price hikes would be difficult. The company is already taking steps to pass on the lower input costs and excise cut benefits to the consumers by reducing prices or increasing sizes. HUL will also continue to increase its focus on rural areas in low penetrated categories. It would continue to invest in innovations and brand building. While the growth prospects look good, they seem to have been already built into the current valuations. We continue to maintain our SELL view on the stock.

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Feb 20, 2020 (Close)