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HUL: Soaps & detergents propel margins
Feb 8, 2012

One liner: Hindustan Unilever Limited has announced its third quarter financial results of 2011-2012 (3QFY12). The company has reported 16.4% YoY increase in sales and 18.2% YoY rise in net profits. Here is our analysis of the results.

Performance summary
  • HUL recorded a 15.8% YoY rise in revenues backed by 16.5% growth in its domestic consumer business. Both home & personal care and food businesses grew in double digits led by robust offtake. During 9mFY12, sales were up by 16% YoY aided by 17.4% growth recorded by the domestic consumer business.
  • Backed by cuts in advertisement spends and lower other expenses, as a percentage of sales, the company was able to reduce its raw material to sales ratio. Resultantly, operating margin expanded by 220 basis points YoY to 16.3%. For 9mFY12, operating margin appreciated by 100 basis points to 14.9%.
  • The robust performance at the operating level could not be translated at the net level on account of restructuring costs of Rs 124 m charged during the quarter. The net margin was maintained at around 12.7% and 12% for 3QFY12 and 9mFY12 respectively.


Financial performance snapshot
Rs(m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Revenues 51,277 59,376 15.8% 147685.9 171274.7 16.0%
Expenditure 44,027 49,671 12.8% 127157.9 145,760.3 14.6%
Operating profit (EBDITA) 7,250 9,705 33.9% 20,528 25,514 24.3%
EBDITA margin (%) 14.1% 16.3%   13.9% 14.9%  
Other income 770 801 4.0% 1,960 2083.5 6.3%
Interest 1 5 650.0% 2.1 10.1 381.0%
Depreciation 563 568 0.9% 1,652 1701.2 3.0%
Profit before tax 7,456 9,933 33.2% 20,834 25,887 24.3%
Extraordinary inc/(exp) 643 (124)   1,232 907.9 -26.3%
Tax 1,724 2,271 31.7% 4697.6 6095.6 29.8%
Profit after tax/(loss) 6,375 7,538 18.2% 17,368 20,699 19.2%
Net profit margin (%) 12.4% 12.7%   11.8% 12.1%  
No. of shares (m)         2161  
Diluted earnings per share (Rs)*         12.18  
Price to earnings ratio (x)*         31.8  
*trailing twelve months

What has driven performance in 3QFY12?
  • Riding on robust volume growth of 9%, HUL's domestic consumer business grew by 16.5% YoY in 3QFY12. Both home & personal care and packaged food divisions clocked sales growth of 18.2% and 12.7%, respectively on a YoY basis. The largest segment, soaps & detergents, witnessed a steep growth of 21% YoY backed by double-digit growth across brands in the laundry and skin cleansing segment. Personal products recorded a volume-driven growth of 14% YoY backed by strong growth witnessed in Fair & Lovely, Ponds, Vaseline, Dove, Clinic Plus and Clear brands. In foods, beverage sales grew by 11% YoY on double-digit growth in tea and coffee and packaged foods recorded a 13.5% YoY jump in sales. Revenues from other business which includes the water-filter business increased by 13% YoY. Only exports, which form 5% of overall sales, fell by 13.8% YoY during the quarter. The overall sales of the company were up by 16.4%. The High Court has sanctioned the scheme of arrangement of transfer of the FMCG export business division of the company into its wholly-owned subsidiary Unilever India Exports with 1 April 2011 as the the appointed date.

    Cost breakup
    Dec 11 quarter % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin gain/(decline) (basis points)
    Soaps and Detergents 44.5% 20.7% 110.2% 13.5% 573
    Personal Products 31.7% 14.0% 2.4% 25.9% (294)
    Beverages 11.3% 11.3% 3.7% 15.7% (115)
    Packaged Foods 4.5% 13.5% -2.2%
    Exports 4.9% -13.8% 96.7% 7.8%                  (543)
    Others 1.9% 13.1% -9.2%

  • The company has been able to combat input cost inflation and raise profitability through competitive brand investment and savings in other expenses. During the quarter, the company's cost of goods to sales ratio increased by 170 basis points to 51.8% on account of input costs as well as rupee depreciation. However advertisement spends as a proportion of sales fell by 290 basis points to 11.6% aided by lower media spends in the soap & detergent segment. Even other expenditure was down by 110 basis points during the quarter. As a result, the operating margin expanded by 220 basis points to 16.3%. But the robust profit performance has been the handiwork of only soaps and detergent segment that saw its PBIT margin appreciate by 570 basis points to 13.5%. HUL's most profitable segment, personal care, eroded its PBIT margin by 290 basis points to 25.9%. Most of the growth in the segment has come through volumes. This coupled with negative pricing due to higher level of price promotions and new launches in low unit price-packs constricted personal product margins during the quarter. Even the profitability of beverages segment declined by 110 basis points. Thus with margins being too lopsided, the company's profitability may come under cloud if the fiercely competitive and mature soaps & detergents segment faces pricing or input cost pressures in future.

  • At 18.2%, growth in earnings is nearly half the growth in operating profits recorded during the quarter. The prime reason has been restructuring costs of Rs 123.8 m charged during the quarter as compared to an exceptional income of Rs 642.9 m earned in the year-ago quarter.

What to expect?
At the current price of Rs 387, the stock is trading at a multiple of 28 times our estimated FY14 earnings.

HUL's topline has been growing at a robust pace with majority of its products growing ahead of the market. Despite input cost inflation, the company has been able to sustain margins backed by cutback in promotional spends and rationalisation of other expenses. This performance, though commendable, is underlined by falling profitability of its personal care segment which raises a red flag as this segment contributes more than 45% to overall operating profits. Although the company has attributed the lower profitability of personal care to higher promotions, it highlights rising competition in this rapidly growing space. Margins in the soap & detergent segment have increased partly on a low base as well as industry-wide lower media spends. Being a mature and competitive product category, margins in this segment can easily come under pressure. This casts a shadow on sustainability of the company's margins in future.

At current valuations, the stock appears overpriced and we would advice investors to remain cautious.

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