HUL Disappoints With Q3FY13

Fast Moving Consumer Goods (FMCG) major Hindustan Unilever (HUL) came out with its results for the Dec 2012 quarter. The numbers were, however, below expectations and hence, disappointing. As soon as the result was announced, the stock plunged 6% while it recovered some of its losses at the end of today’s trading, closing lower almost by 3% to Rs 481.55 per share. The following table gives us the overview of the numbers:

The company posted a subdued top-line growth which is evident from the fact that income from operations grew by 12% to Rs 6654 crore while the net profit grew by 15.59% to Rs 871 crore. The numbers came in on the lower side as the streets were expecting a top-line of around Rs 6828 crore and a bottom-line of around Rs 900 crore. Further major shocker was that the volume growth for the consumer business (which grew at 15%) was meager 5% hinting that the company is witnessing a slowdown of growth.

The raw material expense increased by 9% to Rs 2552 crore, while the raw material to sales ratio declined by 108 basis points to 38.34 which is positive for the company. This happened primarily after the softening of key raw material - Palm oil- for the company.  The advertisement expense moved up 19% to Rs 822 crore while the ratio of advertisement to sales increased by 73 basis points to 12.35%. We believe that the December quarter is usually full of festive season and companies in the sector tend to spend more on advertisement front which helps them to create brand awareness of their products. One may see a rise in the advertisement spend of other FMCG players too in this December quarter of 2012. 

There was no major impact on the EBITDA margin of HUL as it increased marginally by 2 basis points to 16.36%. While the net profit margin for the company improved by 40 basis points to 13.09%   

One of the major announcements from the result was of the royalty payment to its parent plc. The Board of directors of HUL approved a royalty payment of 3.15% of its turnover to its PLC in a phased manner starting from February 2013 up to March 2018. This was a major shocker as the current royalty payment is 1.4% of the total turnover. Higher royalty payments would impact the bottom-line of the company in turn affecting the Earning per Share (EPS) going ahead.

At the current market price of Rs 482 per share, HUL is currently available at TTM PE of 28x which is relatively cheaper given its leadership position. However there are headwinds like slower top-line growth with subdued volume growth and higher royalty payments impacting their performance. We would advise our readers to invest with a Buy on Dip strategy as we expect the share price to see some downside in the near to medium term.