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| HUL: Signs of a slowdown | | Revenue and volume numbers look good earnings quality a concern |
| Malini Bhupta / Mumbai Feb 07, 2012, 00:38 IST |
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 On the face of it, Hindustan Unilever’s performance in the December quarter looks impressive. Revenue has grown 16.4 per cent year-on-year on the back of a nine per cent growth in volume. Given that most consumer companies have shown signs of a slowdown, this is good news. The stock jumped to the day’s high of Rs 410, but finally closed at Rs 387. So, what caused the fall?
No doubt the numbers look good optically, with almost every segment reporting double-digit revenue growth. While soaps and detergents grew 21 per cent year-on-year, personal products and packaged foods grew 14 per cent and 13 per cent, respectively. However, the earnings’ quality isn’t as good or uniform. Analysts say a large part of the Ebit (earnings before interest and tax) growth has come from soaps and detergents. Compared to last year, the competitive intensity in the segment has abated, the reason why margins improved in the December quarter. Even as the personal care segment contributes the most to the bottomline, it did not drive profitability in the third quarter.
What has worried analysts the most is that the personal care segment’s Ebit has grown just two per cent year-on-year to Rs 488 crore. While almost 60 per cent of the Ebit is driven by personal care, 30-35 per cent comes from soaps and detergents. Even as revenue from personal care products grew 14 per cent y-o-y and 17 per cent sequentially, the Ebit has remained flat. According to analysts, the segment showed slowdown signs in the quarter, typically considered a good one for FMCG companies. Most believe while revenue and volume growth may sustain in FY13, profitability could come under pressure. According to them, soaps and detergents can again come under pressure in FY13 if the competitive intensity revives.
However, Mehul Desai, FMCG analyst at KR Choksey, believes 12-13 per cent Ebit margin in the soaps and detergent category is sustainable. It jumped 573 basis points to 13.5 per cent y-o-y in the third quarter, growing 106 basis points sequentially. According to Dhananjay Sinha, equity strategist at Emkay Global, the low value-add business grew phenomenally in the quarter. In comparison, the Ebit margin for personal care products stood at 25.9 per cent, compared to 28.8 per cent in the year-ago period. Even as HUL’s growth strategy is in place, analysts believe it will need to focus on profitability in FY13.
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