Hindustan Unilever’s (HUL’s) third-quarter 2015 earnings grew 18% aided by improved margins in personal care (accounting 32% of this quarter’s sales), as well as large exceptional gains from sale of property. Upon adjustment for one-time items, net profits during the quarter actually declined by 13%. Domestic sales slowed considerably, down to 8% over last year (with underlying volume growth of 3%).
There has been a conscious effort by the company to clear out high-cost inventory in an environment of declining input costs. In fact, despite slow volume growth, HUL’s gross margins were 120 basis points higher this quarter than last year. This was reflected in the higher-than-expected, 28% EBIT margins earned by the personal care segment during the quarter, above our 26% full-year estimate, and 14% in soaps and detergents (accounting for 46% of quarterly sales) versus our 2015 estimate of 13.8%. Going forward, we foresee the company focusing on volume growth while maintaining margins at reasonably profitable levels. We're keeping our margin forecasts intact.
The benefit of falling commodity prices will be passed on to its consumers in the form of lower prices, especially in the mass-market brands. The firm has taken proactive price cuts in soaps and detergents, where prices have been slashed by 5% across portfolios on a weighted-average basis. By initiating price cuts early, we believe HUL is undertaking a wise move of protecting its hard-earned consumer franchise. A similar strategy is followed by Marico in the hair oil category.
Despite these price cuts, we believe HUL will maintain reasonable margins at a portfolio level, as it derives the benefits of adequate spending behind building strong brands, the source of its narrow economic moat rating. We believe the stock is overvalued, trading far above our unchanged INR 626 per share fair value estimate. However, our long-term outlook for this bellwether consumer stock remains favourable.
To read a detailed analysis,,click here.
