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While no fireworks were expected from Hindustan Unilever Ltd (HUL) in the quarter ended June 2016, there were some expectations of green shoots in terms of volume growth. But there was disappointment on this front, with the company recording only a 4 per cent volume growth in the three months ended June 2016, over the same period a year ago.
This is an encore of the performance in the previous quarter. These two quarters mark the lowest level of volume growth achieved by the company in the last six quarters.
Net sales grew 3.5 per cent in the current quarter to ₹7,988 crore. The lower growth in net sales vis-à-vis volumes indicates a continuation of the trend of price cuts in segments such as soaps seen in the last few quarters.
The only solace was on the operating front, with operating margins expanding to 20.1 per cent (19.2 per cent in the year-ago period). Margin expansion was aided partly by benign raw material costs and by sale of premium products. Helped by premium brand Surf, the homecare segment saw margins improve to 13.9 per cent (12.1 per cent). That segment brings about one-thirds of the company’s revenues.
The personal care segment, which brings in almost half the revenues, was affected by a deflation in personal wash products (soaps).The overall weakness in volumes and topline reflected in the stock losing 2 per cent at close.
OutlookWith 45-50 per cent of the company’s revenues coming from rural areas, hopes are pinned on good monsoons to revive rural demand in the near to medium term.
Urban demand for premium staples is also expected to improve from higher disposable incomes due to the 7th Pay Commission payouts.
Advertising spends, at 11 per cent of net sales, continue to be in the elevated 11-12 per cent range (under Ind AS rules) seen in the last few quarters. With input costs too beginning to move up in some pockets, there could be limited room to further expand ad spends or sustain price cuts without affecting the bottomline. A quick revival in demand is inevitable.
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