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HUL: High ad spend hurts bottomline

May 25, 2010

Hindustan Unilever Limited has announced its FY10 results. The company has reported a 5.6% YoY and 4.1% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Sales grow by 8% YoY during 4QFY10 on the back of strong volume growth in the personal products business.
  • Operating (EBITDA) margins fall 1.1% during the quarter to stand at 13.6%. This comes on the back of higher advertisement costs (as a percentage of sales).
  • Bottomline grows by 47%% YoY during the quarter. This is helped by higher extraordinary income. On adjusting for this, bottomline is down 23% YoY.
  • Net profit for FY10 grow by 4% YoY as a result of higher operating income and extraordinary income, and partly offset by increase in taxes. However, when adjusted for the one-time income/loss, profits are down 2% YoY for the year.

(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Net sales 40,573 43,802 8.0% 67,836 177,253 5.6%
Expenditure 34,610 37,848 9.4% 142,285 149,754 5.2%
Operating profit (EBDITA) 5,963 5,955 -0.1% 25,551 27,500 7.6%
EBDITA margin (%) 14.7% 13.6%   15.2% 15.5%  
Other income 203 284 40.2% 1,820 1,481 -18.6%
Interest 22 1 -93.7% 218 70 -68.0%
Depreciation 413 503 21.9% 1,590 1,840 15.7%
Profit before tax 5,731 5,735 0.1% 25,562 27,071 5.9%
Extraordinary inc/(exp) (1,071) 1,955   (276) 1,113  
Tax 710 1,878 164.3% 4,131 6,164 49.2%
Profit after tax/(loss) 3,950 5,812 47.1% 21,155 22,020 4.1%
Net profit margin (%) 9.7% 13.3%   12.6% 12.4%  
No. of shares (m)       2,179.9 2,181.7  
Diluted earnings per share (Rs)         10.1  
Price to earnings ratio (x)         22.7  

What has driven growth in 4QFY10?
  • Sales growth for HUL was entirely volume led. Volumes increased by 11% YoY during the quarter. The sales from FMCG grew by 8% while Home and personal care segment grew by 5% and sales from foods business grew by 18%%. The performance this quarter has been due to the company realigning its marketing strategy. The company has spent on brand building this quarter and launched several new products and at the same time, relaunched all its products. During the quarter, the company grew ahead of market in all segments when compared to AC Nielsen data.

  • Sales of soaps and detergent business which contributes 45.2% of the total revenue fell as a result of reduction in prices of laundry portfolio due to increase in competition. The company reported a strong growth in the personal products portfolio at 19%. This was the result of good volume growth driven by hair, oral and skin care segments. Beverage business of the company grew by on the back of double digit growth in tea and coffee volumes. The quarter saw several relaunches as well as the launch of the company’s new tea brand Brooke Bond Sehatmand positioned in the mass segment. Foods and ice cream grew in double digits on the back of relaunches and new ice cream parlours called Swirl’s being opened. Pure-it water filter continues to grow strongly as a result of increase in penetration and launch of new innovative products like Pure-it Autofill and Pure-it Compact being launched.

  • Operating income remained flattish during the quarter. While the company benefited from lower raw material costs and lower other expenditure, higher spending on brand building ensured that operating income did not increase. Advertisement expense grew by 39% during the quarter, ending at 14% as a percentage of sales.

  • On a segmental basis, the company saw its soaps and detergents business being affected by lowering of prices of the products. This has resulted in the sales falling by 2%. Moreover, increase in brand building has resulted in PBIT margins shrinking by 4%. The company also witnessed PBIT margins for personal products category falling by 0.8% during the quarter as a result of higher advertisement spending for branding building and new launches. PBIT margins for the beverage category improved reflecting the result of price increases. Margins for foods category turned positive for the quarter and stood at 4%. For ice cream business the company recorded a lower loss as compared to the corresponding quarter last year. Margins for others reflecting the water filter business improved. This is a sign that the business is achieving better economies of scale.

  • Net profit of the company improved on the back of lower interest costs and extraordinary profits during the year. The extraordinary profits include profit from sale of long term investments, profit from sale of property and reduction in provision of retirement benefits.

    All round picture
    March quarter % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin gain/(decline)(basis points)
    Soaps and Detergents 45.2% -1.9% -24.2% 12.8% (377)
    Personal Products 28.7% 18.9% 14.4% 21.8% (85)
    Beverages 13.0% 15.3% 20.5% 13.8% 60
    Processed Foods 4.5% 22.7%   4.0% 678
    Ice Creams 1.3% 21.7%   -2.8% 785
    Exports 5.8% 15.7% -7.1% 5.2% (128)
    Others 1.5% -1.0%   -29.9% 728

What to expect?
At the current price of Rs 229, the stock is trading at a multiple of 17 times our estimated FY12 earnings. The company delivered good volume growth and overall grew fastest than the market. However, we are concerned about the increase in competitive intensity that the company is facing. Given this, we would advise investors to be CAUTIOUS on the stock.

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