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HUL: Profitable volume-led growth in FY12 - Views on News from Equitymaster

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HUL: Profitable volume-led growth in FY12

May 2, 2012

Hindustan Unilever Limited has announced its fourth quarter financial results of 2011-2012 (4QFY12). The company has reported 15.7% YoY increase in sales and 20.6% YoY rise in net profits. Here is our analysis of the results.

Performance Summary
  • HUL's revenues grew by 16% YoY on the back of a 20.5% growth in its domestic consumer business. The robust topline growth was led by double-digit growth in the revenues from home & personal care business even as foods business grew in single digits. Revenues in FY12 were up by 12% YoY aided by 17.5% increase in the domestic consumer business.
  • The company has been able to offset the impact of higher raw material costs through reduction in advertisement and other expenses (all as a percentage of sales). This has translated into a 160 basis points improvement in operating margin during the quarter. For FY12, operating profitability appreciated by 130 basis points to 14.9%.
  • Despite a 29.8% rise in operating profit, earnings grew by a relatively subdued 20.6% due to lower exceptional income earned during the quarter as compared to the year-ago level. Earnings for FY12 were up by 16.7%.

Standalone financial performance snapshot
Rs(m) 4QFY11 4QFY12 Change FY11 FY12 Change
Revenues 49,684 57,659 16.1% 197355.1 221163.7 12.1%
Expenditure 43,262 49,325 14.0% 170571.2 188,250.3 10.4%
Operating profit (EBDITA) 6,422 8,334 29.8% 26,784 32,913 22.9%
EBDITA margin (%) 12.9% 14.5%   13.6% 14.9%  
Other income 603 700 16.0% 2,729 2783.1 2.0%
Interest 0 2 900.0% 2.4 12.4 416.7%
Depreciation 556 571 2.6% 2,208 2182.5 -1.2%
Profit before tax 6,469 8,461 30.8% 27,302 33,502 22.7%
Extraordinary inc/(exp) 836 281   2,068 1188.7 -42.5%
Tax 1,613 1,876 16.3% 6310.4 7776.3 23.2%
Profit after tax/(loss) 5,692 6,866 20.6% 23,060 26,914 16.7%
Net profit margin (%) 11.5% 11.9%   11.7% 12.2%  
No. of shares (m)         2161.5  
Diluted earnings per share (Rs)*         12.45  
Price to earnings ratio (x)*         34.2  
*trailing twelve months

What has driven growth in 4QFY12?
  • HUL's domestic consumer business grew by 20.5% YoY in 4QFY12 propelled by 10% YoY growth in volumes. The Home & Personal Care division was the main growth driver clocking a sales growth of 23.6% YoY. In this division, the soaps & detergents segment clocked the fastest growth of 28% YoY backed by higher pricing. Personal products, the second biggest growth driver recorded a strong volume-led growth of 17% YoY backed by double-digit growth in skin care and hair brands. The food division grew by a relatively subdued 7.7% due to a slower 7.6% rise in revenues from beverages on a YoY basis. However, brisk growth in sales of Kissan and Kwality Walls led to a 9.7% YoY rise in packaged food sales during the quarter. As FMCG exports have been demerged into a separate subsidiary with effect from April 2011, the sales of others consisting of marine exports, chemical and water businesses were lower by 46.6% compared to year-ago quarter.

    All round picture
    Mar 12 quarter % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin gain/(decline) (basis points)
    Soaps and Detergents 49.2% 28.4% 93.9% 11.3%  382
    Personal Products 29.7% 17.1% 23.0% 26.3% 126
    Beverages 11.9% 7.6% -0.9% 14.4% (124)
    Packaged Foods 5.5% 9.7%   -1.2%  
    Others(includes Exports, Chemicals, Water etc) 5.9% -46.6%   -1.4%  

  • A strong revival in profitability of the soaps & detergent segment coupled with modest increase in personal product margins enabled HUL to improve its overall operating margin by 160 basis points. Aided by price hikes and a low base effect, the soap and detergent segment saw its EBIT margin expand by 382 basis points. Even the most profitable segment personal care, whose margins had been hit by price promotions last quarter, managed to increase EBIT margin by 126 basis points during the March 2011 quarter backed by higher volumes and better mix. However, margins of beverages contracted by 124 basis points whereas packaged foods slipped into the red. On the cost front, the company continued to keep its brand investments competitive. As a result, its advertisement to sales ratio was down by 80 basis points. Even other expense to sales ratio declined by 131 basis points during the quarter. Together these cost rationalization measures have more than offset the 53 basis points rise in cost of goods sold as a percentage of sales.

  • A 20.5% growth in earnings was considerably watered down mainly on account of higher extraordinary income earned in the year-ago quarter. Depreciation and tax expenses increased by 2.6% and 16.3%, respectively during the quarter.

What to expect?
At the current price of Rs 426, the stock is trading at a multiple of 25 times our estimated FY14 earnings.

HUL has delivered an impressive financial performance in FY12 with its domestic consumer business recording the highest growth since 2009-10. Not only has the company's sales momentum raced ahead of the market, but also the growth has come due to a 10% rise in offtake despite an 8% price hike taken during the year. This clearly shows the pricing power enjoyed by the company. In personal care segment, where HUL has been very aggressive in launching premium and innovative offerings, the growth has been largely volume driven speaking volumes about its growth strategy. Even on the cost front, controlled spends on promotion and other expenses enabled the company to improve profitability during the year.

Going forward, the company is expected to derive mileage from this product expansion. But at current valuations, the stock appears overpriced and we would advice investors to remain cautious.

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