Q1FY14: HUL's Bottomline Declines

The largest FMCG company Hindustan Unilever in India came out with a disappointing set of numbers for the quarter ended June 2013. The highlight of the result is that the bottomline witnessed a decline of 23% on a YoY basis to stand at Rs 1019.25 crore for Q1FY14 as against Rs 1331.19 crore for Q1FY13. On the other hand, there has been almost flattish growth on the topline which went up by 7% on a YoY basis to stand at Rs 6809.04 crore as against Rs 6378.77 crore witnessed during the same quarter of the last fiscal.

Let us now take a look at the operating front and volume growth. The EBITDA witnessed growth of 12% on a YoY basis to stand at Rs 1085.60 crore as against Rs 966.45 crore in Q1FY13. The EBITDA margin stood at 16%, witnessing a gain of 100 basis points on a YoY basis. Volumes growth in the quarter slowed to 4% in Q1FY14, as compared to 9% witnessed during the same quarter last fiscal and 6% during Q4FY13. The street was expecting volumes growth in line with Q4FY13. The company continues to spend heavily on promotional activities and in this quarter, the A&P expenses stood at Rs 70 crore in this quarter. While commodity costs were relatively benign, PFAD (Palm Fatty Acid Distillate - one of the major raw materials) prices started to move up and the rupee depreciated sharply towards the end of the quarter, thus playing spoilsport for the company to some extent.

On the segmental front, Soaps and Detergents and Skin Cleansing sustained double digit volume growth. Products like Lifebuoy, Breeze, Dove and Lux delivered robust volumes. The quarter witnessed price deflation as the benefit of lower commodity costs were passed on to the consumers. Personal Products grew by 2% in a slowing market. In Skin Care, Ponds, Lakmé and Dove delivered a good performance with double digit underlying volumes growth. Fair & Lovely maintained its strong position in the mass skin lightening segment. However, it was impacted by a challenging market context and a strong base effect. Plans are underway to step up the growth momentum. Hair Care had another good quarter with volumes-led double digit growth. Oral Care registered double digit growth driven by the exciting activation on Close Up and a step up on Pepsodent Expert Protection.

The company's tea products delivered one of its strongest quarters with double digit growth across all key brands. Actions taken to strengthen the core, extend distribution and impactful activation have enabled a step up in the growth momentum in this category. Taaza in particular had one of its best performances this quarter, over a reinforced marketing mix. Kissan and Knorr soups sustained double digit growth. The Knorr portfolio was expanded with the launch of the 'Easy to Cook' range of meal makers. Kwality Walls grew modestly, impacted by a slowdown in the Ice Cream market.

However, with the parent company Unilever's comment that they are witnessing a slowdown in the emerging market which in turn may impact the guidance provided by the company has played a dampener for the stock prices in India. The stock closed the day at Rs 661, down by 3.69% on the BSE. At the current market price, the stock trades at a PE of 35x, which is quite high. We believe that the comment from the parent company and today's results may remain an overhang on the stock prices in the coming week too. Therefore, we suggest readers to tread and trade cautiously in this counter.