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HUL: Lacklustre performance - Views on News from Equitymaster
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HUL: Lacklustre performance
Jan 27, 2010

Performance summary
  • Sales for HUL grew by 4.4% during 3QFY10. This growth was aided by the personal products segment, partly offset by soaps and laundry segment due to cut in laundry prices.
  • Operating (EBITDA) margins for the company in 3QFY10 fell by 0.2% to stand at 17.2%. This fall comes on the back of higher advertisement costs (as a percentage of sales) recorded this quarter.
  • Bottom line for 3QFY10 grew by 5.4% YoY on the back of higher extraordinary income. On adjusting for non recurring income, the bottom line fell by 9% YoY.
  • Net profit for 9mFY10 fell by 6% YoY due to a lower exceptional income. However, when adjusted for one time income/loss the bottom line grew by 4% YoY

Rs(m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 43,787 45,732 4.4% 127,263 133,451 4.9%
Expenditure 36,147 37,857 4.7% 107,676 112,823 4.8%
Operating profit (EBDITA) 7,640 7,875 3.1% 19,588 20,628 5.3%
EBDITA margin (%) 17.4% 17.2%   15.4% 15.5%  
Other income 335 389 15.9% 1,617 1,197 -26.0%
Interest 44 2 -95.7% 196 68 -65.1%
Depreciation 406 450 10.9% 1,178 420 -64.3%
Profit before tax 7,526 7,812 3.8% 19,831 21,336 7.6%
Extraordinary inc/(exp) -473 445   795 -842  
Tax 896 1,766 97.1% 3,420 4,286 25.3%
Profit after tax/(loss) 6,157 6,491 5.4% 17,205 16,208 -5.8%
Net profit margin (%) 14.1% 14.2%   13.5% 12.1%  
No. of shares (m) 2,180 2,181   2,180 2,181  
Diluted earnings per share (Rs)*         11.0  
Price to earnings ratio (x)*         24.0  

What has driven growth in 3QFY10?
  • Sales growth for HUL was entirely volume led. The sales from FMCG grew by 4.6% while Home and personal care segment grew by 3.7% and sales from foods business grew by 8.8%. The performance this quarter has been due to the company realigning its marketing strategy. The company has spent on brand building this quarter and relaunched all its products across price points. However, during the quarter, the company lost value market share in most of its categories including laundry, shampoo, toothpaste, tea and coffee.

  • Sales of soaps and detergent business which contributes 45.2% of the total revenue fell as a result of down trading and reduction in prices of laundry portfolio. However on the positive side the company increased its value market share in the soaps market marginally while the volume market share in laundry improved by 1% and that in soaps improved by 0.6%. The company reported a strong growth in the personal products portfolio at 15.5%. This was the result of good volume growth driven by Pond’s White Beauty, Vaseline, Pond’s talc, Dove, Clinic Plus and Sunsilk. The company launched Close Up Peppermint Splash during the quarter in the oral care space which provided growth momentum. Beverage business of the company grew on the back of increase in prices of Tea. However, the company lost market share due to down trading in this category. The down trading was a result of high commodity price and the company lost out as it does not have any product in the discount segment. Foods and ice cream continue to do well on the back of relaunches and new ice cream parlours called Swirl’s being opened. Pure-it water filter continues to grow strongly as a result of increase in penetration and launch of new innovative products like Pure-it Autofill and Pure-it Compact being launched.

  • Operating income grew by 3.1%. This was the result of increased cost efficiencies and buying efficiencies which was used for brand building. As a result, advertisement expense grew by 66% during the quarter, ending at 14% as a percentage of sales.

  • On a segmental basis, the company saw its soaps and detergents business being affected by down trading and lowering of prices of the products. This has resulted in the PBIT margins shrinking by 3%. The company also witnessed PBIT margins for personal products category falling by 1% during the quarter as a result of higher advertisement spending for branding building and new launches. PBIT margins for the beverage category improved reflecting the result of price increases. While margins for foods category improved, margins for ice creams fell as a result of investment in new ice cream parlours by the company. Margins for others reflecting the water filter business improved. This is a sign that the business is achieving better economies of scale.

  • Net profit of the company improved on the back of lower interest costs and extraordinary profits during the year. The extraordinary profits include profit from the sale of property, profit on transfer of assets to subsidiary and profit from disposal of a brand.

    All round picture
    December quarter % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin gain/(decline) (basis points)
    Soaps and Detergents 45.2% -2.4% -20.5% 13.4% (305)
    Personal Products 30.0% 15.5% 12.4% 31.9% (88)
    Beverages 12.0% 7.9% 25.5% 14.8% 208
    Processed Foods 4.1% 9.2% -67.9% -0.7% 161
    Ice Creams 0.8% 7.2% 31.7% -10.2% (189)
    Exports 5.8% -0.6% -51.6% 2.8% (299)
    Others 2.1% 29.7% -41.3% -15.6% 1,887

What to expect?
At Rs.264, the stock is trading at 19.5 times our estimated FY12 earnings. While the company has returned to positive volume growth, we are concerned about the loss of market share in the company’s key categories. Given that the sector is being weighted down by food inflation and increase in competition, we are concerned about the company.

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