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HUL: Volume growth slows down further
Jan 31, 2014

Hindustan Unilever Limited has announced its third quarter financial results of 2013-2014 (3QFY14). The company has reported 9.4% YoY increase in sales and 22% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • For 3QFY14, revenues increased by 8.5% driven by 10% growth in the domestic consumer business. For 9mFY14, topline increased at the same pace of 8.2%.
  • Aided by lower cost of goods sold and employee costs (both as a proportion of sales), the operating margin expanded by 0.6% for both 3QFY14 and 9mFY14.
  • Net profit increased by 22% due to an extraordinary income of Rs 230 m earned during the quarter. For 1HFY14, the net profit fell by 1.2% mainly on account of higher exceptional income earned in the year-ago period.

Rs(m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Revenues 66,548 72,234 8.5% 193,444 209,250 8.2%
Expenditure 55,660 59,966 7.7% 163,124 175,273 7.4%
Operating profit (EBDITA) 10,888 12,268 12.7% 30,320 33,977 12.1%
EBDITA margin (%) 16.4% 17.0% 0.6% 15.7% 16.2% 0.6%
Other income 1,337 1,427 6.7% 5,011 4,704 -6.1%
Interest 75 182 141.7% 191 307 60.4%
Depreciation 593 644 8.7% 1,746 1,948 11.6%
Profit before tax 11,557 12,868 11.3% 33,393 36,426 9.1%
Extraordinary inc/(exp) (73) 230   5,990 1,627 -72.8%
Tax 2,771 2,475 -10.7% 9,288 8,099 -12.8%
Profit after tax/(loss) 8,714 10,623 21.9% 30,095 29,954 -0.5%
Net profit margin (%) 13.1% 14.7% 1.6% 15.6% 14.3% -1.2%
No. of shares (m)         2162.6  
Diluted earnings per share (Rs)*       17.5  
Price to earnings ratio (x)*         32.6  
*trailing twelve months

What has driven growth in 3QFY14?
  • HUL reported an 8.5% revenue growth led by better realizations mainly in soaps and detergents even as underlying volume growth remained tepid at 4%. The company's offtake had grown by 5% in September 2013 quarter. In December 2013 quarter, the Home & Personal Care business grew by 10% driven by 12.4% growth in personal care products and 7% increase in soaps & detergent sales. In soaps & detergents, skin cleansing delivered volume-led growth whereas the growth in laundry was led by the premium segment comprising of Surf Excel Easy Wash & Excel Matic. In household care, both Vim and Domex posted double-digit growth. The personal care segment saw a strong performance led by volume growth in hair care and double-digit growth in both Pepsodent and Germi-check in oral care. The company launched Clinic Plus Vita oil during the quarter. Packaged foods segment was the other driver, clocking an increase of 12.9% backed by double-digit growth in Kissan, Knorr and Kwality Walls. The Beverages segment grew by 7.2% in 3QFY14 aided by double-digit growth in tea.

    Dec 13 quarter % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin gain/(decline) (basis points)
    Soaps and Detergents 47.2% 7.1% 14.5% 13.3% 85
    Personal Products 32.0% 12.4% 13.9% 28.6% 36
    Beverages 11.8% 7.2% -2.2% 16.2% (155)
    Packaged Foods 4.6% 12.9%   -4.1%  
    Others(includes Exports, Chemicals, Water etc) 4.0% -4.7%   -4.6%  

  • Despite rising price of palm fatty acid distillate (PFAD), high crude price as well as rupee depreciation, the company managed to rein in cost of goods sold through judicious pricing and unwinding of promotions. The cost of goods sold to sales ratio declined by 0.7% during the quarter. This along with a 0.3% cut in the proportion of employee costs to sales more than offset a 0.5% rise in ad-spends to sales ratio. Therefore, operating margin expanded by 0.6% during the quarter. Among product segments, only soaps & detergents and personal products reported incremental EBIT margins during the quarter. While soaps & detergents posted a 0.9% rise in EBIT margin, personal products saw a slight rise of 0.4% in EBIT margin. The beverage segment clocked a 1.6% contraction in EBIT margin for the quarter.

  • Excluding the impact of exceptional income, the net profit increased by 21% during the quarter on a 12.7% increase in operating profit. The strong growth was aided by a 11% reduction in tax outgo due to reversal of tax provisions after completion of assessment. However, interest charges shot up by 142% during the quarter due to finance charges related to income tax.
What to expect?
HUL continues to be hit by sluggish offtake, recording volume growth in single-digits since the December 2012 quarter. For 9m FY14, the topline has grown by 8.2% with each of the big segments, soaps & detergents and personal care reporting single digit growths. However, the company has managed to improve margins on judicious pricing. As the discretionary spends have slowed down, the company's sale volumes are unlikely to pick up in the immediate future. Therefore, going ahead profitability may come under pressure with raw materials prices firming up and ad-spends remaining high on rising competitive intensity.

We had given a SELL on this stock. At the current price of Rs 570, the stock is trading at a multiple of 27 times its estimated FY16 earnings. At current valuations, the stock does not provide adequate margin of safety and we maintain a SELL on the stock.

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