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No beating about the bush.
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.