HUL: Street cheers Q2 show, but challenges remain

HUL’s efforts in invigorating its biggest product segment finally paid off, with the company managing to extract strong growth from its soaps and detergents segment. This pulled the overall performance of the company for the September quarter beyond analysts’ expectations and the market cheered it. The HUL stock rose to a record high, closing 7.4% higher on bourses, the highest-ever single-day rise since March 2007.

HUL’s net sales rose by 18%, its highest in the past 11 quarters. This growth comprised a 10% volume growth and a 8% value growth achieved on account of price increases carried out by the company.

Operating profit rose 28% — with operating profit margins expanding by 150 basis points to 15%. This was despite the 26% rise in input costs. The company has managed to effectively cut costs in the areas of advertising and promotion and other expenditures. Both these cost items have remained flat over the same quarter the previous year. This was made possible despite the company relaunching or upgrading many of its products such as Lux, Vim, Fair & Lovely, Vaseline and Ponds in the quarter.

Its main product segments of soaps, detergents and personal products registered double-digit growth in revenues and earnings and also logged a marginal jump in margins. Since the past several quarters, the soaps and detergents segment — the largest contributor to HUL’s topline and bottomline — was the laggard among all segments. In the preceding March quarter, the soaps and detergents segment had recorded a 12.8% rise in revenues and a 5% drop in segmental earnings.

This time, the segment registered a 22% growth in revenues (the highest among all segments) and a 28% growth in segmental earnings (again the highest among all segments). Though amazing, the repeat of the overall performance of the September quarter appears difficult to sustain in the December quarter, given the high base in the previous year.

Besides, inflation and intense competition — challenges identified by the company — may limit its growth. The soaps and detergents segment may still manage to log strong performance due to lower base to contend with for the next two quarters.