HUL continues to suffer from poor sales and profit growth

Its much smaller rivals Dabur and Emami continue to record strong growth quarter after quarter

Despite endless restructuring of its business portfolios and continuous high-profile change of its top management, Hindustan Unilever is unable to generate any traction on its sales and profits. For the September quarter, HUL’s revenues were up by 4% while operating profit was completely flat. Compare this with the performance of Dabur India whose revenues were up by 15% while Emami Group’s sales were up by 27%.

HUL’s revenue growth has been stagnant for many quarters now. Over the past three quarters, average topline growth has ranged between 4%-6% which does not even cover inflation. Revenue growth has been continuously declining from a high of 20% it recorded in September 2008.

The recent September quarter has been especially good for fast-moving consumer goods (FMCG) companies mainly because raw material prices were sharply down in that quarter. For instance, Emami’s raw material cost was down by 35% and even Godrej Consumer Products Limited’s (GCPL’s) raw material cost was down by 15%. Both these companies took advantage of lower cost of raw materials and steady demand for their products. Emami’s operating profit was up by as much as 65%. On the other hand, even though HUL’s raw material cost was down by 9%, it had no profit growth. Dabur’s raw material cost has gone up by 3% and yet it has reported a sales growth of 15% compared to the same quarter last year. What is remarkable about HUL is that it had to spend 41% more on advertising compared to same quarter last year to get only a 4% growth in turnover this quarter (Q2 FY 10).

Another key issue with HUL is that it would maintain its high operating profit margin (39% in September 09) rather than creating growth in sales and operating profit. Interestingly, Dabur also enjoys an OPM of 36% which is as high as HUL but Dabur is able to increase its operating profit and revenues virtually every quarter. In the September quarter Dabur’s operating profit jumped by 21% compared to the same quarter last year.

Debashis Basu with Pallabika Ganguly [email protected]


Shipping industry just can’t float despite govt support

Government has provided many benefits and tax incentives to the Shipping industry but in vain. Shipping companies have not made a mark in the past decade.

The shipping industry is somewhat of a blot on the India growth story. It hasn't added any significant tonnage in over 14 years as compared to the growth in most areas of business. And this, despite a large number of tax incentives, benefits and facilities doled out by the government in every annual budget over this period. In 1996, the industry carried 30% of India's foreign trade; this is now down to just 13% while the rest has gone to foreign shipping companies.

The world sea borne trade has increased by CAGR of 3.6% from 4900 million tonne in 1996 to 7000 million tonne in 2006, at the same time India's sea borne trade has also galloped by CAGR of 10% from 166 million tonne in 1996 to 471 million tonne in 2006, while our GDP has quadrapuled in the period to $ 1100 billion (2007); but Indian shipping has failed to take advantage of this growth. The overall capacity of Indian shipping increased by CAGR of just 2.2% from 7.05 million GT (Gross Tonnage) in 1996 to 9.06 million GT in 2007. This is mainly due to the greed of Indian shipping companies who are active in buying and selling ships at every profit opportunity, rather than expand the freight business. There are however a couple of exceptions such as GE Shipping and Varun Shipping.
Public sector companies like Shipping Corporation of India (SCI) had around 117 vessels of 5.1 million DWT (Dead Weight Tonnage) in 1996, that increased to 5.35 million DWT (87 vessels) in 2009. In effect, they added only 0.2 million of gross tonnage during last 14 years. Most ships purchased in this period were to replace old ships and maintain the age profile of the fleet – this too has remained constant in 14 years with no increase whatsoever. The present age profile is 18 years, which is the same as in 1996. The company’s annual investment has only gone into age profile maintenance.

In the shipping industry, tankers are usually replaced in 25 years and bulk carriers in 20 years. SCI Chairman S C Hazara told Moneylife Digital that the company plans to spend $ 4 billion on 68 ships by 2014. He says that 32 ships are likely to be delivered by 2012 and the remaining will come in by 2014 – this will expand SCI's capacity to 9 million DWT. By 2014, the average age profile of its existing fleet would have increased from 18 years currently to 23 years and will again need replacement and reduce overall capacity. In other words the same story will be repeated over and over again where new ships only replace old ones without any significant increase in gross tonnage. SCI's pervious chairman had also talked about expansion plans but did not delivery and capacity expansion. The saving grace is that SCI does not trade in its ships like other ship owners, but that is only because of the tiresome and time consuming process of getting approval from the shipping ministry.

However, there are plenty of trading opportunities for private companies. Ship valuations move in sync with the freight market, when the freight market slows down, ship valuations decline and offer excellent buying opportunities. When freight market improves, ship prices increase and private shipping companies are quick to sell off ships to make a quick profit.

Essar Shipping used to have 39 ships worth 1.5 million DWT in 1996, now their capacity is down to 1.39 milion DWT in 2007.

GE Shipping had 64 ships worth 1.59 million GT in 1996, it has doubled capacity to 2.84 million DWT with average age of 10 years in 2009 despite taking advantage of trading opportunity. This is probably due to their strategy of buying mainly old ships, which they are quick to trade. Varun shipping had 13 ships for 0.28 million DWT, it has more than doubled capacity in LPG carriers. Today they have 20 ships worth 0.63 million DWT. However, the two private companies were hardly able to create the capacity required to expand India's overall shipping tonnage despite large business opportunities.

Consider this: In 1996, Indian shipping company carried 10.4 % of general cargo, 14.5% of dry bulk and 54% of petroleum products and crude. This has declined to around 4% of general cargo, 8% of dry bulk and 26% of petroleum products and crude – the rest of the business has gone to foreign shipping companies.
Shipping ministry's plans for major investment in capacity have gone haywire. Whether it is boom times or depression, over a longer term, India's total tonnage has remained constant. For instance, between 1996 to 2004 the industry saw the deletion of 2.78 million tonne of capacity as against an addition of just 2.29 million tonnes.

This was followed by unprecedented boom in shipping time during 2005-08 when freight prices rose and triggered high valuation of ships. In fact, second hand ships were more expensive than new ships, which had a waiting period of two to three years for delivery. Consequently, that period say an addition of 4.99 million tonnage against deletion of 2.7 million tonnes. Yet, over the 14 year period, we are terribly short of what we needed to command a respectable shipping tonnage and that has reduced the share of Indian shipping to just 13 % of tonnage of total foreign trade.
Dhruv Rathi with Amritha Pillay   [email protected]


North Indian cement units might suffer due to a spill-over effect

Cement producers in north India expect demand to improve despite fall in prices while analysts believe demand will be unable to meet the oversupply in the market

Cement manufacturers from northern India are confident that there would be continuous demand following projects related with the Commonwealth Games, infrastructure and housing and the rates will go up. However, analysts feel that a spill-over additional supply from other regions may leave North India’s cement producers disappointed.

Cement prices in north India have already fallen by Rs10 to Rs15 per bag in the past month. Following the end of the monsoon, cement manufacturers are expecting increase in demand. Next year, there would be the Commonwealth Games in New Delhi which needs newer stadiums, bigger roads, hotels and other infrastructure. This will also boost the demand for cement. While agreeing with the demand scenario, analysts are sceptical about possible price increase.

“We expect cement consumption growth in India to remain strong, with the thrust on infrastructure and strong demand from rural housing. However, huge capacities that are expected to come on stream in the second half of FY10 are expected to exert pressure on the cement prices. We expect these additional capacities to fully ramp up over the next three-four months and eventually exert pressure on cement prices,” said Angel Broking Ltd in a report.

According to an Edelweiss Consumer report, cement prices were down in Lucknow by Rs80 to Rs100 per bag from peak prices of Rs325 per bag. In Kanpur too, prices are down by Rs10 to Rs15 per bag and further pressure is expected. Currently, only the National Capital Region has been unaffected by a fall in cement prices as there is a strong demand. This strong demand however, is matched by supply, the report said.

"Even if the demand for the region may go up, there will be a pinch on the prices due to supply. In the north the prices have fallen by Rs10 to Rs15 per bag in the past one month. It may be delayed by two to three months, but this is going to be there. Now the expectation is that demand will improve after the end of monsoon and the holiday season. They expect more demand from the Commonwealth Games also. This is what is likely to drive the demand for cement. There is also a bounce back of Rs5 per bag," said Amit Srivastava, research analyst, Karvy Stock Broking Ltd.

A further fall in cement prices in north India is likely to be witnessed in the next three to six months due to a spill-over effect from other regions of India. This is likely to be evident in the fourth quarter of 2010.

Emkay Global Financial Services Ltd in a report said, “We agree that given the surplus cement scenario in FY10 and first half of FY11, cement prices are expected to remain under pressure. We also agree that given the negative news flow in the short-term, the sector is likely to underperform. However, we would like to reiterate our medium- to long-term positive view on the sector given that the declining consensus earnings already factor the softening cement price."
Mr Srivastava added, "Ultimately, when we look at the larger picture of the country, then we believe it is not only about the north Indian part, there will be a supply from other parts of India. There are certain supplies coming from the eastern part, the western part and other parts of India. Supply from the regions where demand is not so good, will be diverted to the Northern region. The northern region is already increasing capacity in lieu of higher demand. On a larger scale, we thus believe that prices will fall. This further fall in cement prices is likely to happen in the fourth quarter of 2010."

Though there have been bounce-backs in the prices by around Rs5, both in north India and south India, analysts believe it will not help in the long term.

"There has been a fall in prices in southern India; we thus expect a bounce of back of Rs5 to Rs10 per bag, though this will not last for a longer term," Mr Srivastava added.

Officials from Shree Cement Ltd, one of the key players in north India, were not immediately available for comment.
-Amritha Pillay [email protected]


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