Hindustan Unilever Ltd (HUL)'s Q1FY2011 results are below our expectations on account of a sharp decline in the operating profit margin (OPM), which was affected by higher year-on-year (y-o-y) advertisement cost and other expenses coupled with a price reduction undertaken in the key categories to improve the sales volume and maintain the market share. As expected, the volume growth picked up by a good 11% year on year (yoy) in the domestic consumer business.
Despite the double-digit volume growth, the net sales grew by just 7.1% yoy to Rs4,793.9 crore in Q1FY2011 due to aggressive pricing reductions implemented in the key categories (especially in the soap and detergent categories) to improve the sales volumes and maintain the market share in a competitive scenario. The net sales were below our expectation of Rs4,475.7 crore during the quarter.
As anticipated, the soap and detergent segment delivered a muted performance with the revenues of the segment growing by just 2.4% yoy to Rs2,264.5 crore. The muted performance was on account of a lower sales realisation due to the price reductions in the soap and detergent category. The company?s pricing action helped it to recover the sales volume with the detergent volume growing in double digits. On the other hand, the personal care segment grew by 11.4% yoy to Rs1,365.5 crore, entirely a volume driven growth. Overall, the home and personal care (HPC) business? revenues grew by 5.6% yoy to Rs3,630 crore (a volume-led growth).
The food business (including beverages, processed foods and ice creams) grew by 12.0% yoy during the quarter. The processed food segment grew by 22.7% yoy to Rs211.1 crore with most of the brands achieving a robust volume growth. The ice cream segment registered a strong growth of 18.0% yoy during the quarter. However, the beverages (contributing around 60% to the food business) grew by 7.7% yoy to Rs537.8 crore.
Despite a lower raw material cost as a percentage of sales, the OPM declined by 289 basis points yoy to 12.5% on account of higher advertisement cost and other expenses on a y-o-y basis.
HUL's advertisement cost as percentage to sales increased by 313 basis points to 15.7% on account of large spends for building brands, sustaining the market share and creating new categories. Thus, the operating profit declined by 13.0% yoy to Rs598.6 crore, which was lower than our expectation of Rs665.4 crore for the quarter.
The adjusted net profit stood at Rs517.2 crore, which was lower than our expectation of Rs553.3 crore of net profit for the quarter.
Though the company's sales volume growth is expected to remain robust, the higher advertisement spend to maintain market share and the muted top line growth (on account of the price reductions in the key categories) would keep its profitability under pressure in the coming quarters (especially when the prices of its key raw materials are showing an upward trend).
At the current market price the stock trades at 25.0x its FY2011E earnings per share (EPS) of Rs10.4 and 21.5x ts FY2012E EPS of Rs12.1.
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