Hindustan Unilever cuts prices, makes play for volume growth - Livemint

The overall sales growth of 7.63% for Hindustan Unilever, too, points to little contribution from price and mix. Photo: Pradeep Gaur/Mint

The key investor disappointment in Hindustan Unilever Ltd ’s (HUL) December quarter numbers seems to be its volume growth of 3%. That is a comedown from the 5% volume growth seen in the past couple of quarters, and also weaker than expected by the market. But perhaps the expectations themselves were overblown since they had little support from the underlying economic data. The fact that the HUL stock trades at 42 times its estimated earnings for 2015-16 may also have had something to do with it.

But despite a fall in consumer price inflation in the last quarter, discretionary demand has not picked up yet. This is evident in segments such as personal products, where the market volume growth has been especially sluggish, and the late onset of winter has also not helped. Sales growth in this segment fell to 6.5% in the December quarter, compared with the 9.9% growth in the three months to September. City shoppers haven’t returned to stores and modern trade is still a problem for the consumer goods industry. Still, as HUL has been at pains to point out, its volume growth is ahead of the market’s 1%.

The overall sales growth of 7.63%, too, points to little contribution from price and mix. To be sure, there were other factors at play. The company no longer received tax breaks at some manufacturing locations that dented sales growth by as much as 1.2 percentage points. But, overall, the lack of demand has meant the pricing power was limited.

HUL resorted to price cuts in soaps and detergents, which explains why sales growth in that segment fell to 6%. These price cuts were made possible by fast falling raw material costs; HUL’s cost of goods sold as a proportion of sales has fallen by 1.2 percentage points from a year ago. They also help it remain competitive. Otherwise, smaller firms nimbler at passing on these costs would eat into its market share.

In its earnings statement, the company says its focus is on “sustained volume-led growth and margin improvement”. But in the December quarter at least, the company’s focus seems to have been mostly on maximizing volume growth. Thus, although overall operating margins increased, the improvement was curtailed at 15 basis points from a year ago, lower than market expectations. One basis point is one-hundredth of a percentage point.

HUL seems to be playing a waiting game for the market to improve. With its operating leverage, even a few percentage points increase in volume growth will yield a sizable improvement in profits. Sharply falling consumer inflation and rising consumer confidence mean expectations of better volume growth will continue. But HUL’s princely valuations seem to have already discounted that.