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HUL: Pricing power returns

Jul 29, 2011

Hindustan Unilever Limited has announced its first quarter financial results of 2011-2012 (1QFY12). The company has reported 14.4% YoY increase in sales and 17.6% YoY rise in net profits. Here is our analysis of the results.

Performance summary
  • Revenues of HUL grew by 14.4% YoY during 1QFY12 on the back of volume & value growth. All segments reported double-digit growth during the quarter.
  • Operating (EBITDA) margins were down by 50 basis points YOY to 13.5%.The impact of higher raw material cost was partially offset by a cut in advertisement expense.
  • Net profit rose by 17.6% YOY during the quarter. The steep rise was on account of higher other income as well as extraordinary income earned from property sale and stake dilution in subsidiary company. Excluding the onetime income, the bottomline grew by only 7.3% YOY.
  • The net profit margin was up by 30 basis points YOY to 11.2% during the quarter.

Financial performance snapshot
Rs(m) 1QFY11 1QFY12 Change
Revenues 48,762 55,794 14.4%
Expenditure 41,953 48,251 15.0%
Operating profit (EBDITA) 6,809 7,543 10.8%
EBDITA margin (%) 14.0% 13.5%  
Other income 421 506 20.2%
Interest 1 0 -75.0%
Depreciation 535 562 5.0%
Profit before tax 6,694 7,487 11.8%
Extraordinary inc/(exp) 185 588 217.6%
Tax 1,548 1,802 16.4%
Profit after tax/(loss) 5,332 6,272 17.6%
Net profit margin (%) 10.9% 11.2%  
No. of shares (m) 2,182 2,161  
Diluted earnings per share (Rs)*   11.0  
Price to earnings ratio (x)*   29.3  
* On a trailing 12-months basis

What has driven performance in 1QFY12?
  • Revenue growth of HUL was led by volume growth despite price hikes taken to counter inflation. Its domestic consumer business grew by 15% on an underlying volume growth of 8.3%. All the segments reported double-digit growth during the quarter. Sales of Home and Personal Care business grew by 15.4% while food business grew by 14.9%. Even exports, which contribute only 4.7% to overall sales, clocked a 15.7% rise during the quarter. The company wants to demerge its export business to wholly-owned subsidiary, Unilever Exports for better focus.
  • All round picture
    June 11 quarter % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin gain/(decline) (basis points)
    Soaps and Detergents 45.8% 12.8% -5.1% 9.2% (175)
    Personal Products 24.5% 19.4% 22.0% 25.3% 457
    Beverages 9.6% 13.1% 8.4% 12.4% (54)
    Packaged Foods 6.7% 17.8% -32.8% 4.7% (352)
    Exports 4.7% 15.7% 4.4% 7.7% (84)
    Others 1.9% -5.3% - -2.4% -

  • Sales of soaps and detergent business grew 12.8% YoY contributed by both price and volume. This was led by across the board growth in brands and formats with RIN registering double-digit volume growth. Sales of personal product accelerated by 19.4% on the back of double-digit, volume led growth performance of its skin care, hair care & oral care products. Beverage business of the company grew by 13.1% YoY. This was driven by strong performance by both tea and coffee portfolios. Packaged foods grew by 17.8% YoY with Kissan and Knorr brands growing by over 9% coupled with robust sales growth by Kwality Walls. Pure-it water filter continued to expand its presence across retail channels and launched economically priced Pureit Intella to straddle across the various price points.

  • Operating profit grew by 10.8% YoY. This was despite a 23.5% YoY jump in raw material costs. HUL was able to effectively manage commodity inflation through judicious pricing and cuts in advertisement spend. During the quarter, the advertisement expenses in personal care and packaged products were increased whereas spends in soaps & detergents were reduced in line with the overall industry trends. Thus the selling expense to sales ratio fell by 410 basis points YOY to 11.3%, the lowest level in the past one year. This partially reined in the 380 basis points rise in raw material costs (as percentage of sales). As a result, HUL restricted the fall in operating margin to 50 basis points YOY, which is commendable in an inflationary environment. On a segmental basis, the operating profitability of its main-stay soaps and detergents business was down by 175 basis points YOY due to rising crude price. Beverages saw its operating profitability shrink by 54 basis points YOY due to steep rise in coffee prices. The PBIT margin of packaged foods witnessed a 352 basis points fall YOY. The overall margins for foods category decreased by 172 basis points to 9.5%. But personal products, which has been benefitting from growing demand for high-margin premium products, continued to clock higher profitability. PBIT margin for the personal products category surged to 25.3% from 20.8% in the year-ago quarter. The operating loss for other business, including the water filter business, was lower this quarter on account of growing revenues from Pureit category.

  • Net profit of HUL clocked a 17.6% jump on the back of huge extraordinary income earned during the quarter. The company earned profits of 509.9 million and 41.4 million from property sale and stake sale in subsidiary Hindustan Field Services, respectively. Other income increased by 20.2% YoY during the quarter. Excluding the onetime income, the bottomline grew by only 7.3% YOY.

What to expect?
At the current price of Rs 324 the stock is trading at a multiple of 26.8 times our estimated FY13 earnings. HUL was able to clock robust topline growth through higher sale volumes garnered despite selective price-hikes. Even on the cost front, the company was able to effectively manage commodity inflation using judicious pricing and cut in advertisement spends. This enabled HUL regain pricing power, particularly in laundry segment, and protect its margins. However, competitive pressures from incumbents will keep the company on its toes. We believe that HUL by virtue of its wide reach and strong brand value will optimise its growth performance without hurting margins. However, since the stock has run up a bit in recent times, we would advise investors to exercise caution.

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Jun 14, 2021 (Close)