At Hindustan Unilever, all eyes on monsoon

Hindustan Unilever Ltd (HUL), India's leading fast moving consumer goods company and a barometer of consumer demand in the country, said the April-June quarter was a challenging one but demand could return with good monsoon.

The industry growth slowed down in both value and volume terms in the first quarter with high commodity prices and stiff competition adding to the pressure.

Sanjiv Mehta, CEO and managing director, HUL, said if you go back two years, the total market volume growth used to be about 4-5%.

"It has been coming down since, and virtually this quarter the volume growth – for the market – is zero to slightly negative. That's been the overall trend. Having said that we have grown underlying volume at 4%."

Good rainfall should augur well no question about that but it's too early yet to see the impact, he said.

"Once you have a good rainfall, good harvest, good money into the hands of the farmers and producers of food produce, we should start seeing a further uplift in the demand in the rural areas," said Mehta, adding that the growth has been muted in mass products and general trade across both rural and urban markets.

Despite a challenging environment, P B Balaji, chief financial officer, HUL said its business is tracking ahead of the market with sustained margin improvement.

The company reported 6% increase in profit after tax but before exceptional items at Rs 1,128 crore while net profit was up 10% at Rs 1,174 crore. "Domestic consumer business grew by 4% with an underlying volume growth of 4%. Operating profit was at Rs 1,543 crore, up by 7% and margin at 19.3% were up 70 basis points (bps)," he said.

The impact of phase-out on excise duty benefits on PBIT was about 15 bps, and the cost of goods sold was lower by 100 bps. "This was driven fundamentally by lower input costs as well as savings programmes. We maintained competitive ad spends despite advertising and promotional spends going down by 50 bps. Employee costs were up 70 bps in the June quarter, arising fundamentally from a provision reversal in the base quarter," said Balaji.

Despite a slowing market, it was a broad-based growth across segments for HUL in the June quarter of fiscal 2017 with home care growing by 7%, personal care by 2%, refreshment by 5% and foods by 4%. "In the case of home care, the growth was led by healthy volumes and in personal care a step-up in personal products was offset by a deflation in personal wash segment. Refreshments continued its sturdy growth and foods had a healthy underlying growth, which was impacted by one-offs," said Balaji.

As for overall price growth level, Balaji said it is better than what has been witnessed in the previous few quarters. "That's an intention of how we are optimising our promotion spends and take pricing up where it makes sense.

This is one of the levers of cost and as we have said in the past, cost is a reality and how do we actually play and manage it is something we do continuously to stay competitive while simultaneously drive efficiency to the business," said Balaji.

There has been zero price growth in the June quarter compared to the negative deflation witnessed in the past, he said.

The near-term outlook, the company said, is likely to remain muted and there are also concerns on the recent volume trends. "The commodity cycle has bottomed out as well, leading to higher input costs going forward. In this context, our focus will continue to drive volume-led growth with improvement in operating margin," said Balaji, adding that the company remained optimistic about the medium-term impact of both the monsoon and the Seventh Pay Commission payouts.

the company is making a new capital investment in Assam reiterating its commitment to Make in India. To be commissioned in early 2017, the new unit is located close to the existing factory in Assam and will call for an investment of about Rs 1,000 crore. "The investment is subject to receipt of requisite approvals and clearance," said Balaji adding that the company is in advanced stages of seeking approvals.

The company will also exit its equal-stake joint venture (JV) with Kimberly-Clark (KC) formed in 1995, to be able to focus on its core business. The JV has revenues of Rs 250 crore. The HUL board has approved to divest its shareholding in Kimberly-Clark Lever Private (KCLL) to its JV partner, Kimberly-Clark Corporation (KCC).

"Both HUL and KC will be working very closely over the next few months to ensure that we come up with a sensible plan of how this happens. In the interim, the business continues as usual," said Balaji.

Also, Punit Misra, executive director and vice-president - sales and consumer department, has decided to leave the company to pursue an external opportunity. "Srinandan Sundaram, currently VP skin care, will take over from Punit. The change will be effective from September 1, 2016," the company said.