HUL: Soaps business holds the key to co's prospects

Hindustan Unilever’s (HUL) strategy to launch new products in existing categories with higher promotional budget appears to have worked. On Monday, the company reported substantial improvement in overall sales volumes and margin for the September 2010 quarter. In fact, the numbers were the best in the last three quarters.

Though on a year-on-year basis, HUL’s numbers were lacklustre, what caught the Street’s attention was a better rate of growth in volumes and operating profits compared with the previous quarter’s growth. Volumes , for instance, rose 14% in the September quarter from the year-ago level. This was better than the 11% growth in the June quarter. Also, operating margin before depreciation was 16.3% as against 15.5% in the last quarter. The performance of the soaps and detergents business, the segment contributing almost 45% to HUL sales, has long remained a sore point for the company. This is because of the difficulty to pass on the full impact of rising raw material costs to consumers. In the September quarter, however, it increased prices of products in the category. This resulted in a higher year-on-year growth in sales and better margin compared with the previous quarter.

Other revenue segments for HUL include home products (28.7%), beverages (12%) and processed foods (4.6%). Compared with the yearago quarter, the sales growth in the home products and processed food segments has been good but not as impressive as the soap & detergent and beverages categories. This can be mainly attributed to the highly competitive nature of the industry and slow industry growth. In terms of segment-wise net profits, of the four categories , only processed food category has shown increase in profitability. Despite growth in sales, the remaining categories have showed decline in profits mainly due to higher input costs. This explains the 170 basis points decline in the overall operating margin. Despite lower operating margin, net profit grew by 32% mainly due to one-time item, which includes the sale of property.

Going ahead, food inflation is likely to ease given the better monsoon season. This should aid profitability and increase the company’s topline. The company’s stock increased by 1.4% on Monday after the results announcement. In the last two months, it has increased 14.5%. Given that HUL’s earnings per share has remained stagnant over the last few quarters, the stock’s current valuation seems to have factored in the possible future growth. While the company has delivered improved numbers in the September quarter, the performance of its soaps and detergents business will determine the extent of its future turnaround.