Companies

Shift in product mixboosts HUL performance

Aarati Krishnan | Updated on July 28, 2011 Published on July 28, 2011

The sales growth of 15 per cent in its domestic FMCG business was superior to the March quarter (14 per cent) and pretty good in light of what its much smaller rivals delivered.





Hindustan Unilever (HUL) managed to improve its sales growth trajectory and keep its profits growing in the latest June quarter, but that wasn't enough to excite the stock market.

The sales growth of 15 per cent in its domestic FMCG business was superior to the March quarter (14 per cent) and pretty good in light of what its much smaller rivals delivered. However, market expectations had already budgeted for that. And while almost the whole of HUL's sales expansion in the March quarter came from higher volumes (read higher offtake), volume growth moderated to 8.3 per cent in the latest June quarter, with higher selling prices lifting sales.

Cutting spends again

HUL also managed to expand its profits, both at the operating level and at the net level, by about 11 per cent despite the persisting high input costs. That the recent cooling off in crude oil and palm oil prices are yet to benefit HUL is evident from the continued escalation its raw materials bill. The company's cost of goods sold stood at 55.8 per cent of sales in the latest June quarter, well above last year's 51 per cent as well as the March quarter's 54.3 per cent. In light of rising material costs, the company kept its profit margins from sliding too sharply by the simple ploy of cutting back on its advertising and promotional expenses. Nothing new there, as HUL had begun to economise on its adspends in deference to rising costs in the previous March quarter itself.

Better mix

While the above numbers signal business-as-usual for the company, there were a few interesting takeaways from the segment-wise results. One, both soaps and detergents and personal products, HUL's bread-and-butter categories have accelerated their sales growth rates. Soaps and detergent sales grew by 12.8 per cent in the June quarter compared to 11.4 per cent in March and personal products growth surged to 19.4 per cent from 13.6 per cent in the preceding quarter. Given that peers in these categories have not grown as strongly, this could be a sign of market share gains for HUL. Two, the jump in personal product sales had a salutary effect on margins, with this segment now contributing well over half (54 per cent) of HUL's profits before interest and taxes, while soaps and detergents contribute less than a third. If this trend persists, that will be good news for HUL as it will have made a successful shift in its product mix towards higher margin-earning categories that also enjoy better pricing power.

Three, profits in the June quarter also got a lift from the big drop in segment losses (Rs.27 crore in June 2010 to Rs.2.5 crore in the latest June quarter) in the ‘water & others' segment. Given that this segment has been in the red for the past four years, any turnaround can make a big difference to HUL's overall profit picture.

Published on July 28, 2011
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