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HUL: Mixed effects of price hike - Views on News from Equitymaster

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HUL: Mixed effects of price hike
May 11, 2009

Performance summary
  • The company has adopted a change in the accounting year and will follow the financial year (April to March) rather than the calendar year. Hence, the full year results (CY08) are not comparable with that of CY07.
  • Topline grows mere 5% YoY during March quarter on account of decline in volume sales even though realizations are higher.
  • Reports a 2% YoY improvement in operating margins mainly on account of lower input costs as percentage of sales.
  • Excluding the extraordinary items, the profits during the quarter are higher by 20% YoY.
  • The Board of Directors has recommended a final dividend of Rs 4 per share (dividend yield of 3.2%).


Standalone financials
(Rs m) Mar-08 Mar-09 % change CY07 CY08** % change
Net sales 38,399 40,354 5.1% 138,691 206,016 48.5%
Expenditure 33,548 34,391 2.5% 117,968 175,614 48.9%
Operating profit (EBDITA) 4,851 5,963 22.9% 20,723 30,402 46.7%
EBDITA margin (%) 12.6% 14.8% 14.9% 14.8%
Other income 236 203 -14.1% 2,379 2,056 -13.6%
Interest 35 22 -36.9% 255 253 -0.7%
Depreciation 363 413 13.6% 1,384 1,953 41.2%
Profit before tax 4,689 5,731 22.2% 21,463 30,251 40.9%
Extraordinary item 25 (1,071) 2,261 (251)
Tax 905 710 -21.5% 4,470 5,036 12.7%
Profit after tax/(loss) 3,810 3,950 3.7% 19,255 24,965 29.7%
Net profit margin (%) 9.9% 9.8%   13.9% 12.1%
No. of shares (m) 2178.0 2179.9   2177.5 2179.9
Diluted earnings per share (Rs)* 11.5
Price to earnings ratio (x)*   19.9
*On a 12-month trailing basis
**The full year audited results are for the 15 month period ended 31st March, 2009
and are not comparable with those of year ended 31st December,2007.

What has driven performance in the March 2009 quarter?
  • HUL witnessed a topline growth of 5% YoY driven by price increases during the quarter. However, volumes declined by around 4% YoY due to down trading. The company had taken price hikes earlier in order to offset the higher input costs. However, on account of the price hikes, the company saw lower volume offtake and loss of market share. Further, in anticipation of price cuts by the company in line with its peers, the dealers reduced the stock holding equivalent to 3 days average sales. HPC (Home & Personal Care) saw a 12% YoY growth in revenues, while food division reported a 13% YoY growth. The export sales were down 45% YoY due to a planned reduction in noncore exports. On a comparable basis, the sales for the 12 month period are higher by 16% YoY.

  • Soaps and detergent division, which contributes 50% to the topline, saw a 16% YoY growth in revenues. Though price hikes aided growth, volumes were under pressure, particularly at the bottom end. The personal care and processed foods segment witnessed a 2% YoY and 8% YoY increase respectively; this is lower on account of the closure of 1,200 retail stores. Beverages and ice-creams did well. Pure-It is now a Rs 2 bn brand with more than 1 m units sold in the last 12 months. The company is losing its market share in oral and skin cleansing category. The management has indicated that it plans to take measures and will continue investing in brands in these categories to regain the share.

  • HUL reported a 2% YoY improvement in operating margins mainly on account of lower input costs (as percentage of sales). Decline in major commodity prices in the recent months coupled with price hikes taken by the company during the previous quarters led to the expansion in margins to 14.8% during the quarter from 12.6%. Prices of crude and palm oil have declined by 66% and 41% respectively from their peak. Further, lower ad and other costs too aided the increase. During the full year, the margins remained stable at 14.8%. The company has done better than our estimates on the margin front.

  • On the PBIT front, personal care and food segment saw a decline in margins. Cost pressures and slowdown in modern trade impacted the companyís processed foods business. However, beverages saw an improvement in PBIT margins of 100 basis points during the quarter. The personal care segment was also impacted due to lower sales. Soaps and detergents division reported a 3.2% YoY jump in margins mainly on account of an improvement in product mix, lower input costs particularly palm oil and the end of the price war with P&G. Water business losses have declined by about 20% YoY during the quarter.

  • Excluding the extraordinary items, (profit on sale of properties, incremental provision for retirement benefits, restructuring costs and provision for remediation of a site), the profits during the quarter were higher by 20% YoY. Higher operating margins and lower interest costs led to the increase. For the 12 month period on a like to like basis, the profits were higher by 11% YoY.

    All round picture..
    March quarter % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin(decline)/gain (basis points)
    Soaps and Detergents 49.9% 15.8% 43.4% 16.6% 320
    Personal Products 25.7% 1.9% -2.8% 23.0% (112)
    Beverages 12.1% 13.5% 22.4% 13.4% 100
    Foods (includes Oils and Fats, Culinary and Branded Staples ) 4.0% 7.5% 0.0% -2.7% (500)
    Ice Creams 1.1% 22.4% -25.6% -4.1% 270
    Exports 5.5% -44.7% -19.3% 6.5% 210
    Others (includes Chemicals, Agri, Plantations etc) 1.7% 53.0% -20.7% -35.9% 3,330

What to expect?
At the current price of Rs 228, the stock is trading at 19.6 times our CY10 estimates. While the price hikes taken by HUL led to an improvement in operating margins, it did affect its volumes and market share. The market share of its soap and detergent segment stood at 36.8% for the March quarter, as compared to 38.2% in the December quarter and 38.9% last year. The premium category continues to do well, while pressure is being seen in the low end segment. However, the company has taken price reductions recently, which is expected to benefit the company in terms of higher volumes going forward.

Further, as per the management, during the calendar year CY08, the companyís revenue growth stood at 20%, higher by 3% than AC Nielsen reported sector growth indicating market share gain by the company. Further, there is some divergent trend between AC Nielsen and IMRB household panel survey for HULís market share. The company would continue to focus on maintaining its competitive growth. Its strategy includes strengthening brands by delivering appropriate mix at the right price points. While we believe that the company is taking proper measures, the valuations, are looking stretched from a medium term perspective.

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