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HUL: Raw material costs squeeze profits
May 9, 2011

Hindustan Unilever Limited has announced its fourth quarter financial results of 2010-2011 (4QFY11). The company has reported 13.4% YoY increase in sales and 2.1% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Sales of HUL grew by 13.4% YoY during 4QFY11 on the back of strong performance by the home and personal care and foods segments.
  • Operating (EBITDA) margins fell by 0.6% during the quarter to stand at 13%. This comes on the back of higher raw material costs partially offset by fall in employee costs and advertisement expense during the quarter (all as a percentage of sales).
  • Bottom line fell by 2.1% YoY during the quarter. This is due to a sharp fall in onetime income partially offset by higher other income and fall in effective tax rate. When adjusting for onetime income, the bottom line grew by 26% YoY.
  • For FY11, HULís bottom line grew by 4.7% YoY while net profit margin fell by 0.7% to 11.7%. This performance comes on the back of higher other income and increase in onetime income. When adjusted for onetime income, net profit fell by 0.4%.


Financial performance: A snapshot
Rs(m) 4QFY10 4QFY11 Change FY10 FY11 Change
Net sales 43,802 49,666 13.4% 177,253 197,352 11.3%
Expenditure 37,848 43,201 14.1% 149,754 170,359 13.8%
Operating profit (EBDITA) 5,955 6,465 8.6% 27,500 26,993 -1.8%
EBDITA margin (%) 13.6% 13.0%   15.5% 13.7%  
Other income 284 560 97.0% 1,481 2,519 70.1%
Interest 1 0 -85.7% 70 2 -96.6%
Depreciation 503 556 10.6% 1,840 2,208 20.0%
Profit before tax 5,735 6,468 12.8% 27,071 27,302 0.9%
Extraordinary inc/(exp) 1,955 836 -57.2% 1,113 2,068 85.8%
Tax 1,878 1,613 -14.1% 6,164 6,310 2.4%
Profit after tax/(loss) 5,812 5,692 -2.1% 22,020 23,060 4.7%
Net profit margin (%) 13.3% 11.5%   12.4% 11.7%  
No. of shares (m) 2,182 2,160   2,182 2,160  
Diluted earnings per share (Rs)*         10.7  
Price to earnings ratio (x)*         26.9  
*trailing twelve months

What has driven growth in 4QFY11?
  • Sales growth for HUL was volume led. Sales of Home and Personal Care business grew by 13.6% YoY while sales of foods business grew by 15.4%. The performance this quarter has been broad based with the company spending on brand building, defending its market position and relaunching several new products over the quarter.

    All round picture
    Dec quarter % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin gain/(decline) (basis points)
    Soaps and Detergents 44.5% 11.4% -34.4% 7.5% (525)
    Personal Products 29.4% 16.2% 33.6% 25.0% 325
    Beverages 12.8% 11.2% 25.7% 15.7% 181
    Processed Foods 5.0% 26.6% 5.8% 3.3% (65)
    Ice Creams 1.4% 21.0% -1.2% 169
    Exports 5.6% 9.3% 104.3% 9.8% 454
    Others 1.2% -4.2% -18.7% 1,124

  • Sales of soaps and detergent business which contributes 44.5% of the total revenue was up by 11.4% YoY. This was led by a broad based growth across bars and powders. The company reported a strong growth in the personal products portfolio at 16.2% YoY. This performance was broad based with skin care and hair care delivering a double digit growth. Beverage business of the company grew by 25.7% YoY. This was on the back of strong performance by both tea and coffee portfolios. Processed foods grew by 26.6% YoY while ice cream grew by 21% YoY. Pure-it water filter continues to grow strongly as a result of increase in penetration and product offering across multiple price points.

  • Operating income grew by 8.6% YoY during the quarter. This was slower than top line growth and was a result of sharp increase in raw material costs and other expenditure. While raw material grew by 19.9% YoY, other expenditure grew by 14.4% YoY. However fall in staff costs and advertisement expense helped support the operating income growth. Staff costs fell by 1.5% YoY while advertisement expense fell by 0.5% YoY during the quarter. On a segmental basis, the company saw its soaps and detergents business being affected by lowering of prices of the products and heightened competitive activity. This has resulted in PBIT margins shrinking by 5.3%. Margins for the personal products category grew by 3.3% during the quarter. PBIT margins for the beverage category improved by 1.8%. Margins for foods category fell by 0.7% reflecting high commodity prices. For ice cream business, the company reduced its operating losses during the quarter. The loss at operating level for others business, reflecting the water filter business, was lower this quarter as the Pureit category starts to mature and the company reduces its investment behind the brand.

  • Net profit of the company fell on the back of lower operating income and lower extraordinary income partially offset by higher other income and fall in effective tax rates. Other income increased by 97% YoY during the quarter while effective tax rate fell from 32.7% in 4QFY10 to 24.9% in 4QFY11.

What to expect?
At the current price of Rs 287, the stock is trading at a multiple of 20.5 times our estimated FY13 earnings (RPro subscribers please click here. The company delivered good volume growth. However, we are concerned about the increase in competitive intensity that the company is facing. This has driven down profitability for the company. Given this, we would advise investors to be CAUTIOUS on the stock.

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