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HUL: Disappointing quarter - Views on News from Equitymaster

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HUL: Disappointing quarter
Jul 27, 2010

Hindustan Unilever Limited has announced its 1QFY11 results. The company has reported 8.3% YoY and 1.8% YoY increase in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Sales of HUL grew by 8% YoY during 1QFY11 on the back of strong volume growth.
  • Operating (EBITDA) margins fall by 1.9% during the quarter to stand at 14%. This comes on the back of higher advertisement costs (as a percentage of sales).
  • Bottom line fell by 1.8%% YoY during the quarter. This is due to lower operating income. However, higher other income, lower interest costs and extraordinary gains helped cap the fall in net profits. When adjusted for extraordinary items, the bottom line is seen to fall by 4% YoY.


Financial performance snapshot
Rs(m) 1QFY10 1QFY11 Change
Net sales 45,026 48,762 8.3%
Expenditure 37,876 41,953 10.8%
Operating profit (EBDITA) 7,150 6,809 -4.8%
EBDITA margin (%) 15.9% 14.0%  
Other income 335 421 25.6%
Interest 52 1 -98.5%
Depreciation 425 535 25.9%
Profit before tax 7,009 6,695 -4.5%
Extraordinary inc/(exp) 65 185  
Tax 1,643 1,548 -5.8%
Profit after tax/(loss) 5,432 5,332 -1.8%
Net profit margin (%) 12.1% 10.9%  
No. of shares (m) 2,181 2,182  
Diluted earnings per share (Rs)*   10.0  
Price to earnings ratio (x)*   26.0  
*trailing twelve months

What has driven performance in 1QFY11?
  • Sales growth for HUL was entirely volume led. Volumes increased by 11% YoY during the quarter. The sales from FMCG grew by 6.7% while Home and personal care segment grew by 5.2% and sales from foods business grew by 13.4%. The performance this quarter has been due to the company realigning its marketing strategy. The company has spent on brand building, defending its market position and launching several new products this quarter.

    All round picture
    June quarter % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin gain/(decline) (basis points)
    Soaps and Detergents 46.6% 2.4% -34.8% 11.0% (626)
    Personal Products 28.1% 11.4% 25.5% 24.8% 279
    Beverages 11.1% 7.7% -1.1% 12.9% (115)
    Processed Foods 4.3% 22.7%   5.0% 574
    Ice Creams 2.2% 18.1%   14.6% (283)
    Exports 5.4% 2.8% 10.5% 8.6% 59
    Others 2.3% 41.8%   -23.6% 1,155

  • Sales of soaps and detergent business which contributes 46.6% of the total revenue was flat 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 11.4%. This was the result of good volume growth driven by hair, oral and skin care segments. Beverage business of the company grew on the back of double digit growth in tea. The quarter saw several relaunches as well as the national launch of the company’s new tea brand Brooke Bond Sehatmand positioned in the mass segment. Foods and ice cream grew in double digits. 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 at Rs 1,000.

  • Operating income fell during the quarter. While the company benefited from lower raw material costs and lower staff costs, higher spending on brand building saw operating income dip by 5% YoY. Advertisement expense grew by 34% during the quarter, ending at 15.4% 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 and heightened competitive activity. This has resulted in the sales increasing by a muted 2.4% YoY. Moreover, increase in brand building has resulted in PBIT margins shrinking by 6.2%. Margins for the personal products category improved by 2.8% during the quarter. PBIT margins for the beverage category fell as a result of higher tea prices. Margins for foods category turned positive for the quarter and stood at 5%. For ice cream business, the margins fell as a result of opening of new ice-cream parlours called Swirl’s. The loss at operating level for others reflecting the water filter business was lower this quarter. This is a sign that the business is achieving better economies of scale.

  • Net profit of the company fell on the back of lower operating costs. However, the fall could have been more but for higher other income, lower interest expense and higher extraordinary profits during the year. The extraordinary profits include profit from sale of long term investments, profit from sale of property and sale of a subsidiary.

What to expect?
At the current price of Rs 261, the stock is trading at a multiple of 18.6 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. Given this, we would advise investors to be CAUTIOUS on the stock.

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