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HUL Net Up 15%, but Low Volumes Worry Street

Investors also fret over cos plan to increase royalty to parent


OUR BUREAU MUMBAI Hindustan Unilever (HUL), the countrys largest consumer goods company, posted a 14.6% rise in net profit in line with expectations on the back of rising prices, but low volume growth and a proposal to increase royalty payments to its parent resulted in its share falling 8% from an intraday high. It closed at . 481.55, down 2.88% in a flat market. The Indian arm of Unilever Plc now pays a royalty of over 1.4% of net sales, which will increase, in a phased manner, to 3.15% by 2018, the company said. From next month till March 2014, it will be hiked by 50 basis points (one basis point is one-hundredth of a percentage point) and, subsequently, between 30 bps and 70 bps each year for the next four years. Our preliminary analysis suggests 3% and 5% contraction in EBITDA post this new royalty, if other things are constant, said Rikesh Parikh, VP - markets strategy & equities, Motilal Oswal Securities. Defending the increased royalty payments, HUL said as competition intensifies, particularly from global players, Unilever is committed to supporting it with new products, innovations, technologies and services. But, given the need for increased levels of service and the consequent additional costs, Unilever asked for a review of the royalty arrangement to ensure a fair recovery of costs. In recent years, Unilever has been globalising the resources for doing innovations, developing technology and functional capabilities. In developing and emerging (D&E) markets, you need to compete with the scale and might of Unilever in totality. More costs are being incurred to create technology and innovations and there is an increased focus on D&E markets that includes India, said R Sridhar, chief financial officer, HUL. HULs Royalty Rate to be Lower Than Global Peers Even after March 2014, HULs royalty rate will be lower than global consumer goods companies such as Nestle India and GSK Consumer, which pay 3.4% and 3.6% of sales, respectively, to their parent companies. The royalty rate for Colgate Palmolive India is 5.4% and P&G Hygienes is 4.9%. HUL posted a 14.6% growth in profit, but said it may have to combat challenges arising from inflation and currency volatility. It vowed to maintain relentless focus on cost management and execution to contain these threats. HUL said its profit after tax before exceptional items rose to . 873.09 crore in the three months to December 2012, against . 762.17 crore in the year-ago quarter, and its operating margin at 16% was up by 40 bps. The companys domestic sales, widely seen as a proxy for demand for fastmoving consumer goods (FMCG) in the country, went up by 15% to . 6,158 crore from . 5,360 crore in the year-ago period, in line with the FMCG industry, which grew by 14-16% during the quarter, HUL said. Of the total sales growth, 5 percentage points came from underlying volume growth, its lowest in the last three years. In the short term, clearly, there is inflation. There will be some stress on consumer wallets and, therefore, there is a possibility that the slower pace of growth in discretionary categories that we saw could continue for a little while, said Sridhar. But will it continue structurally in the next five years? Absolutely not. Its cost of goods sold during the period was 30 bps lower than in the year-ago period. HULs

performance, however, indicates that consumer demand is gradually getting impacted after robust sales in the last two years because of inflation and a slowing economy. Analysts, too, are concerned by the slowdown in volumes the actual number of products that customers were putting in their shopping baskets in key segments such as soaps and detergents. We believe weakening consumer sentiment following high inflation and employment challenges is putting pressure on consumers wallets. Discretionary categories are now facing stress and the lack of inclusive growth in the economy will continue to hurt low-ticket spending, Nitin Mathur, consumer research analyst at Esprito Santo Securities, said. HUL, also Indias largest advertiser, increased its advertising and promotion spends by 100% to . 822 crore, or 12.4% of its sales, in the third quarter. The sales of its largest segment soaps and detergents rose 20% in the quarter, mainly due to price hikes and new launches in brands like Lifebuoy. New launches in Dove and Fair & Lovely drove up sales of personal care products by 13%.

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