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HUL: Personal products disappoint - Views on News from Equitymaster

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HUL: Personal products disappoint
Jul 28, 2009

Performance summary
  • Net sales grew by 8% YoY on the back of increase in sales of soaps and detergents and personal products category.
  • Operating (EBITDA) margins increase to 16% as a percentage of net sales. This increase is due to higher margins in soaps and detergents category. However, the margins were negatively impacted by drop in operating margins of personal products category.
  • Net profit margins adjusted for exceptional/extraordinary items contract to 12% due to fall in other income and the impact of higher taxes.


Financials
(Rs m) 1QFY09 1QFY10 Change
Net sales 41,528 44,757 7.8%
Other Operating Income 839 270  
Expenditure 36,014 37,876 5%
Operating profit (EBDITA) 6,354 7,150 13%
EBDITA margin (%) 15.3% 16.0%  
Other Income 808 335 -58%
Interest 87.2 51.7  
Depreciation 379 425 12%
Profit before tax 6,695 7,009 5%
Tax 1,294 1,643 27%
Exceptional/extraordinary Items 653 180  
Profit after tax/(loss) 6,054 5,547 -8%
Profit after tax/(loss)^ 5,401 5,367 -1%
Net profit margin (%) 13% 12%  
No. of shares (m) 2,178 2,181  
Diluted earnings per share (Rs)*^   10  
Price to earnings ratio (x)*^   29  
* On a trailing 12 months basis
^ not inclusive of exceptional/extraordinary items

What has driven growth in 1QFY10?
    All round picture..
    June quarter % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin gain/(decline) (basis points
    Soaps and Detergents 49% 9% 28% 17% 254
    Personal Products 27% 15% -9% 22% (582)
    Beverages 11% 19% 14% 14% (51)
    Processed Foods 4% 15% -134% -1% (326)
    Ice Creams 2% 23% 13% 17% (157)
    Exports 6% -35% -29% 8% 65
    Others 2% -6% 10% -35% (518)

  • HUL witnessed a top line growth of 8% on the back of volume increases and price hikes. The revenue growth could have been higher if not for the reduction of noncore exports sales. The company also suffered from changing business environment wherein distributors reduced their inventory levels to improve upon their operating leverage.

  • The sales of soaps and detergent business grew by 9% YoY. This is on the back of a 2% YoY volume growth. This is an encouraging sign as the volume growth for this category had declined 4% YoY in the March 2009 quarter. The company, however, witnessed down trading in some of its detergent brands. Personal products business and processed foods saw strong growth due to new launches and witnessed a volume led growth.

  • Operating (EBITDA) margins expanded to 16% due to falling raw material prices and lower employee costs as a percentage of net sales. However, the margins would have been higher if not for an increase in advertising and promotion costs.

  • EBIT margins for soaps and detergents expanded to 17% due to falling raw material prices. However, the margins for personal products category fell sharply due to increase in advertisement and promotion spending to support new product launches.

  • Net profit adjusted for exceptional/extraordinary items decreased by 1% while the margins fell to 12%. While higher sales and operating margins helped increase net profit, it was affected by lower other operating income and higher tax expenses. This has resulted in HUL ending the quarter with lower YoY profits.

What to expect?
The stock at Rs 281 is trading at a multiple of 19 times our estimated FY12 earnings per share. The volume growth for soaps and detergents business is encouraging after a quarter of negative growth. HUL has indicated that going forward the company will concentrate on increasing its market share and will be spending more on advertisement and promotions. This seems a positive strategy as the company needs to regain its markets share since in a competitive and low inflation scenario, the company will not be able to increase its prices. Going forward we will be tracking how this strategy of the company pans out and when the company’s increased spending on brand building bear fruit.

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