Offered the choice of cutting back on its advertising spends to deal with rising input costs, Hindustan Unilever (HUL) seems to have decided to sacrifice its profit margins instead. The company's net profits for the quarter ended December 31, 2010 have declined by about 1.7 per cent compared to the same period last year, dented mainly by spiralling costs for soap, detergent and personal product inputs.

The company's sales expanded by a healthy 11.6 per cent this quarter. The company has been successful at driving a higher sales trajectory (growth was 9.7 per cent in the preceding six months of this fiscal), by persisting with fairly high spending on advertising and promotions.

Ad spends up some more

The company's ad spend to sales ratio, already high at about 14.05 per cent of sales in December 2009 has inched up even further to 14.8 per cent to Rs 743 crore in the latest December quarter. That ratio is high even by FMCG industry standards and arms HUL, which already dwarfs its competitors with its size, with a huge war-chest to pump into brand building efforts. HUL's smaller rivals in soaps, detergents and other categories are already beginning to economise to some extent, on ad spend to deal with escalating raw material costs.

Cost squeeze

Rising costs of input such as palm oil, LAB and packaging material have taken a bite out of HUL's profit margins in the latest quarter.

A breakup of the numbers shows that the company has had to contend with multiple pressure points on its costs.

Input costs as a proportion of sales climbed from 48.9 per cent to 51.1 per cent year on year, even as depreciation and ‘other expenditure' too rose.

Price increases

HUL has already begun to take selective price increases on categories such as soaps, detergents and personal products to pass on higher input costs to consumers, in the preceding quarter.

However, the sharp year on year slide in segment margins on soaps and detergents shows that price-lines in this large category are yet to compensate fully for higher costs.

That HUL continues to invest heavily in nascent categories is also evident from negative segment margins in processed foods and ice creams, even as their sales grew at a healthy clip.

Thanks to its unrelenting brand building effort, the overall picture on HUL's topline remains encouraging.

Not only have total sales grown at nearly 12 per cent year on year, individual categories such as personal products (20 per cent sales growth), beverages (9 per cent), processed foods (18.5 per cent), ice creams (31 per cent) displayed very strong growth.

Market shares

This could be a sign that HUL's persistence with ad spends is helping it protect or even expand market shares in its key categories.