Price fluctuations, regional rivals give HUL a hard knock

Cautious stockists, who were taken in by repeated price fluctuations and price-sensitive customers, who shifted in bulk to cheaper options offered by regional competitors, have made Hindustan Unilever (HUL) post a quarterly result that fell short of analyst forecasts.

For the quarter ended March 31, 2009, India���s largest consumer goods company reported a 4% rise in profit after tax (PAT) at Rs 395 crore and a 5% growth in total income (comprising net sales and other operating income) compared with the year-ago period. Excluding exceptional losses, net profit grew 20%.

The company���s strategy to cut prices of its various products in tandem with the fall in input costs seems to have backfired in the fiercely competitive fast moving consumer goods (FMCG) market. The price cuts, in the range of 10-20%, made traders wait and watch, as they expected further cuts, and culminated in fewer bulk offtake. However, the company views this as a transitional response and expects the situation to improve in the current quarter.

The revenues were also affected by down trading by consumers ��� industry parlance for consumers moving to cheaper options ��� especially in laundry and personal wash categories. The slowdown in the retail industry leading to outlet consolidation also hit HUL, which earns 8-9% of its revenues from malls and such avenues of modern trade. It also saw a 40% drop in other operational income.

While the FMCG market has grown in general, the company witnessed a drop in market share in certain product categories such as toilet soaps, a clear indication that regional FMCG players, with their lower priced products, are making an impact.

The worst affected were the personal care products and processed foods categories. While profits dipped in the first category despite a marginal increase in sales, the latter, clocked a loss of Rs 4.5 crore for the quarter despite higher investments. Rise in input costs was a major reason for the bad show in processed foods category.

However, despite all this, the company improved its operating profit margin by 200 basis points to 15%, and net profit margin (excluding extraordinary losses) by 140 bps to 11.3%, compared with the previous year.

Sequentially, the March quarter was the worst in fiscal 2009 for HUL. Compared with the December quarter, HUL saw an 8% dip in total income and a 25% drop net profit (excluding extraordinary items) in the March quarter. The profit margins are also 200 bps down.