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HUL’s sales growth has again not kept pace with inflation, net profit is down despite an advertising blitzkrieg of 71% in the December quarter
The third-quarter results of Hindustan Unilever Ltd (HUL) shows that the company continues to be a rudderless boat. It has sunk further into a quagmire of low growth and high advertising expenditure. HUL, of course, sees things differently. The company which has some of the best-known consumer brands (Lux, Liril, Dove, Pepsodent etc.), claims to have reported “strong growth”. Strong growth in this case meant 5% rise in sales during the third quarter (Q3) of FY10 over Q3FY09.
HUL has also stated that its volume growth has “accelerated” by 5% in the December quarter. Compared with the scorching growth every single consumer products company is recording, HUL’s idea of strong growth and accelerating volume growth is strange. If 5% growth rate is strong in a market like India, what will you call the 16% sales growth reported by Godrej Consumer Products Ltd during the same period? Godrej has a much smaller portfolio of products but these are obviously marketed in a much smarter way compared to HUL, which at one time was looked upon with awe by marketing professionals. Indeed, sales of the core of HUL’s product range—soaps and detergents—actually shrank by 2.4% quarter-on-quarter.
HUL also claims that increased cost savings and buying efficiencies improved gross margins. This looks like a dubious claim. In Q3FY09, sales were Rs4,307 crore and operating profit was Rs723 crore, a gross margin of 16.8%. In Q3FY10, operating profit barely inched up to Rs742 crore on sales of Rs4,504 crore. This yields a margin of 16.5%. Operating margin fell; it did not rise, as HUL claims.
HUL’s December quarter looks pretty pathetic by itself, belying the optimism and cheer of its press release. Set against the galloping advertising expenditure, it should look worrying for shareholders. During the third quarter, HUL, a 52%-owned subsidiary of Anglo-Dutch giant Unilever, spent Rs632.88 crore on advertising and promotions, a 71% jump over the same quarter last year. During Q3FY09, the company spent Rs371.02 crore on the same. Since this ad spend did not lead to higher sales, it means either this huge spending was a drain or HUL’s sales would simply slump if they were not propped up by advertising and promotions.
The key problem with HUL that remains unaddressed for almost decades now is that it has no pricing power, very little competitive edge and its marketing has become totally ineffective. The December quarter results reinforce this view.
Fears of monetary tightening by the RBI, along with weak global cues, pulled down Indian markets
Indian investors remained cautious ahead of the quarterly Reserve Bank of India (RBI) monetary policy review on 29 January 2010. It is widely expected that the RBI is set to increase the cash reserve ratio (CRR) requirements for banks. CRR is the level of cash that banks must keep in deposits with the central bank.
Bourses slipped further on the back of weak openings at European markets. At the end of the day, the Sensex closed at 16,290, declining 491 points from Monday’s close while the Nifty closed at 4,853, down 155 points. Indian markets are expected to remain volatile as traders roll positions in the derivative segment from January 2010 series to February 2010 series ahead of the expiry of the near-month January 2010 contracts on Thursday, 28 January 2010.
At 12:00 hrs IST the Sensex was trading at 16,491, down 289 points from the previous day’s close while the Nifty declined 95 points, trading at 4,913.
At 14:00 hrs IST the Sensex further declined 448 points and was trading at 16,332 while the Nifty was trading at 4,862, down 146 points.
At the end of the day, Jaiprakash Power Ventures plunged 8% after the company announced that it had launched the issue of foreign currency convertible bonds worth $200 million.
EdServ Softsystems has been awarded a vocational training provider (VTP) status for the southern region represented by the Regional Directorate for Apprenticeship Training of Chennai and Hyderabad regions of the ministry of labour, government of India. The stock was down 2%.
Lanco Infratech has been awarded five contracts totalling Rs5,676 crore. The stock declined 5%.
TRF Ltd has received an award worth Rs316.38 crore from NTPC for supply, transportation and installation of coal-handling facilities. The company has also received an additional NTPC order worth Rs295.24 crore. However, the stock was down 3%.
Indian Infoline declined 6%. The company has acquired Orient Global’s stake in two of the company’s unlisted subsidiaries India Infoline Investment Services and India Infoline Marketing Services Ltd.
Edelweiss Capital declined 3%. The company is going to buy Anagram Capital for Rs164 crore in cash.
As per reports, aggregate results of 757 Indian companies showed 48% rise in net profit and 19% rise in sales in the December 2009 quarter over the same period last year.
The International Monetary Fund, in an update of its World Economic Outlook, said that the world economy will expand by 3.9% in 2010, much higher than the 3.1% it projected in October, and the pace will pick up to 4.3% next year. It also said that India’s economy would grow at around 7.7% this year and 7.8% in 2011.
During the day, Asia’s key benchmark indices in Japan, Hong Kong, Singapore, South Korea, Taiwan and China were down by between 0.38%-1.09% on fears of China’s central bank tightening rates, and Japan’s outlook downgrade by Standard & Poor’s.
On Tuesday, 26 January 2010, the Dow Jones Industrial Average was down three points while the S&P 500 and the Nasdaq Composite were down five points and seven points respectively.
As per US reports, consumer confidence hit its highest level since September 2008 to 55.9 from an upwardly revised 53.6 in December. Also, the national retail federation reported that retail sales were likely to rise 2.5% this year, after a 2.5% drop in 2009.
However, in premarket trading, the Dow was trading one point lower.
We expect the market to move upwards from here on. We won’t be surprised to see the Sensex hitting 16,900 in the coming days.