HUL: Where is the pre-GST disturbance?

Volumes remain flat in Q1; price hikes and cost-control measures help

FMCG major Hindustan Unilever’s (HUL’s) June quarter results may be interpreted in two ways. A pessimist would be tempted to point out that a flat volume growth is not much to be contended with. However, a majority of analysts emphasise that a flat growth isn’t bad given the circumstances in the said quarter.

Abneesh Roy of Edelweiss, who expected volumes to decline 1–2 per cent in Q1, given the destocking at dealers’ end, says the numbers have bettered his expectations. Despite a zero volume growth, net revenues (excluding excise) grew 5.2 per cent yearon-year at ~8,401 crore, while net profit (adjusted for oneoff items) expanded 17.5 per cent to ~1,296 crore. Reported net profit was up 9.3 per cent at ~1,283 crore. Operating margins during the quarter rose 180 basis points (bps) year-on-year to 21.9 per cent.

Even gross margins (revenues less cost of goods sold) increased marginally to 52.1 per cent in the first quarter, indicating that raw material prices are largely under check and haven’t risen as anticipated earlier. These numbers are ahead of the Street’s expectations and point out that the price hikes in the past and cost control measures have helped the company.

These numbers have been achieved despite its core personal care segment reporting a mere 3.5 per cent year-on-year growth in revenues. The segment comprising soaps, shampoo and skin care products accounts for 47 per cent of the company’s total revenue. The personal care segment’s Ebit (earnings before interest and tax) margin expanded only 50 basis points to 24.7 per cent, though it remains to the most margins-accretive segment for HUL. Other segments such as home care and refreshments posted a 230 bps and a 310 bps year-on-year increase in Ebit margins.

A positive impact of the ongoing cost rationalisation drive (an effort driven by its Dutch parent Unilever) was visible during the quarter. Advertisement spends, employee costs and other expenses as a percentage of sales were maintained nearabout or marginally lower than the year-ago level of 4.9–14.7 per cent. Thus, a marginal 1.7 per cent increase in these costs didn’t affect the company.

However, the room to implement more price hikes may be limited. The management has stated that it may not take a price hike in soaps and detergent segment for the next two–three months. A good monsoon spell and a relatively low base of FY17 should help HUL sustain the Q1 momentum on revenue and profitability fronts, with some expansion in volumes.

Edelweiss’ Roy extrapolates the Q1 performance also indicates the partial return in rural demand. Overall, the Street is expected to absorb HUL’s Q1 show positively on Wednesday. Analysts believe, despite a 40 per cent year-to-date price appreciation, there is more room for stock re-rating as earnings upgrade for FY18 and FY19 looks likely.