Image: Danish Siddiqui/REUTERS
Hindustan Unilever Limited, India’s largest consumer products company sold less soaps, shampoos and detergents in the quarter gone by as consumers pulled back on purchases due to the cash shortage caused by the government rendering certain high value notes unusable. Meanwhile raw material prices continued to rise making it harder for the company to maintain margins.
Volume growth, a key metric of the health of the business, fell four percent even as the company managed to deliver a flat top line of Rs 8,317 crore for the three months to December 2016, on account of price hikes. Net profit before accounting for gains from sale of property fell 10 percent to Rs 919 crore. EDITDA margins were down 70 bps even as the cost of goods sold rose 60 bps.
Management commentary centered around the effects of the governments demonetization exercise, which, at least in November (the month when it was announced) caused demand to freeze. “All categories were impacted as the purchase sizes came down even as the frequency of shop visits went up,” said P Balaji, chief financial officer, Hindustan Unilever Limited. He pointed out that consumers have in the past two months spread out their purchases over the course of the entire month as opposed to buying a bulk of their monthly needs in the first week of the month.
Still, HUL took pains to point out that it had a nimble response to the situation. The company doubled its credit period to distributors to 40 days, from 20 earlier, to help them tide over the cash shortage. This has since been pulled back. “It’s too early to say when sales will start picking up across India or whether we have been more affected than others,” said Sanjiv Mehta, CEO of Hindustan Unilever. He is keenly awaiting the numbers of other consumer goods companies to see how the industry has fared.
While overall demand was down HUL did notice that demand in the west and south, in urban markets and modern trade was less affected than north, east and central India, rural markets and small shops and kiranas (mom-and-pop stores). Significantly, the company said that growth in its premium brands like Dove, Ponds and Lakme was unaffected. This it said pointed to the resilience in consumer demand. Unlike its competitors HUL chose not to reduce advertising expenses as it felt its brands could get better visibility in an environment where its competitors were advertising less. Advertising and promotion expenses declined 5 percent to Rs885 crore but that was on account of lesser promotions.
The next quarter will be crucial for the company as it hopes to get a clearer sense of how much demand is picking up. As of now it says it can’t make a clear distinction between how much demand has slowed down in its distribution channel and how much it has slowed down with customers. It still expects rural demand to remain subdued for the next few months even as urban demand is expected to resume an upward trajectory.
The results were declared after market hours. HUL’s stock ended the day up 0.25 percent to close at Rs 863 at the Bombay Stock Exchange. It has risen 4.3 percent since the start of the year.