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HUL: Volumes pick-up but margins flat - Views on News from Equitymaster

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HUL: Volumes pick-up but margins flat

Jul 28, 2014

Hindustan Unilever Limited has announced its first quarter results for financial year 2014-2015 (1QFY15). The company has reported 13% YoY growth in sales and 4% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Revenues grew by 13% on underlying volume growth of 6%. Each of the Home & Personal Care and Food businesses grew by 13% each during the quarter
  • The operating margin expanded by 1.1% backed by lower ad-spends and staff costs ( both as a proportion of sales)
  • Net profit, however, grew by a muted 4% on account of lower extraordinary income earned from the sale of properties as compared to the year-ago quarter. Even the tax incidence in June 2014 quarter was high at 30% as compared to 23% in the year-ago quarter resulting in tepid rise in profits. Excluding the impact of extraordinary items, profit has grown by 11% but net margin remained flat.

Standalone financial performance snapshot
(Rs. m) 1QFY14 1QFY15 Change
Total income 68,090 77,163 13.3%
Expenditure 57,234 63,998 11.8%
Operating profit (EBITDA) 10,856 13,165 21.3%
EBITDA margin (%) 15.9% 17.1% 1.1%
Other income 1,768 2,021 14.3%
Interest  62 63  
Depreciation 664 667 0.4%
Profit before tax 11,897 14,457 21.5%
Extraordinary inc/(exp) 1,063 396  
Tax 2,767 4,285 54.9%
Profit after tax/(loss) 10,193 10,569 3.7%
Net profit margin (%) 15.0% 13.7% -1.3%
No. of shares (m)   2163  
Diluted earnings per share (Rs)*   18.0  
Price to earnings ratio (x)   38.4  
* trailing 12 month earnings

What has driven the performance in 1QFY15?
  • Backed by double-digit growth in all major product segments, HUL posted 13% revenue growth. The underlying volume growth during the quarter improved to 6% from 3% in the preceding quarter. Its core business segment, soaps 7 detergents, grew by 13% led by double –digit growth in skin-cleansing and premium end of home care segments. The personal product segment recorded growth of 15% driven by double-digit growth in skin care, hair care and colour cosmetics. Beverages posted growth of 11% on the back of strong volume-led growth in tea and robust growth in coffee. Packaged foods registered the fastest growth of 19% aided by strong double-digit growth in Kissan, Knorr and Kwality Walls. Even its Pureit water business recorded double-digit growth led by premium end of the product portfolio.

    All round picture
    Jun14 quarter % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin gain/(decline) (basis points)
    Soaps and Detergents 50.0% 12.9% 21.1% 13.8% 93
    Personal Products 28.1% 14.7% 27.4% 27.6% 277
    Beverages 10.9% 10.5% -1.8% 16.3% (202)
    Packaged Foods 6.0% 18.8%   12.9% 584
    Others(includes Exports, Chemicals, Water etc) 3.6% 8.5%   -5.5% (452)

  • Operating margin expanded by 1.1% YoY aided by cut in staff costs and lower ad-spends to sales ratio. A 2% YoY savings in employee costs was on account of one-time credit of Rs 320 m of unutilized pension corpus. The proportion of ad-spends to sales ratio fell to 12.2% in 1QFY15 from 13% in 1QFY14. Even other expense to sales ratio was down by 0.2%. These cost savings more than offset the 0.6% increase in input cost to sales ratio translating in higher operating margin for the quarter. Among product segments only soaps & detergents, personal products and packaged foods posted incremental EBIT margins for the quarter. Personal product segment saw a huge jump of 2.8% in EBIT margin on a weak base, low media intensity and smart recovery in the Fair & Lovely post re-launch.

  • The company has managed to keep operating margin in-tact through judicious pricing and cost savings. Even though the price of inputs such as palm fatty acid distillate (PFAD) and crude was higher than year-ago levels, the company's raw material cost to sales ratio was down by 0.5%. Brand investments were maintained at competitive levels with high ad-spends offset by lower promotional activities. Therefore the advertisement & promotional expenditure in relation to sales was down by 0.9% during the quarter. These cost savings were neutralized by steep double-digit rise in each of the employee costs and other expenditure. High conversion charges and freight costs as well as increased mould costs on product launches led to a sharp 15% jump in other expenses during the quarter. Among product only packaged foods and beverages posted incremental EBIT margins whereas the soaps and detergent segment has sustained EBIT margin for the quarter.

  • However, excluding the impact of exceptional income, net margin is flat. This is on account of a 55% jump in tax outgo. The tax incidence rose to 30% in 1QFY15 from 23% in 1QFY14. Interest and depreciations charges remained almost unchanged for the quarter.
What to expect?

HUL has posted a smart recovery in topline growth on the back of broad-based recovery across product segments. Even offtake has witnessed improvement. However, small packs are growing faster than the base packs which has led to fall in the company's gross margins from the mix perspective. As HUL has been focussing on premiumization and innovation, the shift in preference towards small packs is likely to adversely impact the company in the short run. Even high brand investments and royalty payments are likely to limit margin expansion. However, the company's long term prospects remain bright as discretionary spending picks up again on improving economy.
We had given a SELL on this stock. At the current price of Rs 693, the stock trades at a P/E multiple of 30 times its FY17 earnings. At current valuations, the stock is overpriced and we maintain a SELL on the stock.

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