Can HUL sustain growth amid rising competition, price hikes?

Even though Hindustan Unilever (HUL) posted its highest reported net profit for the December 2011 quarter not everyone seem to be happy with the results.

Citi has downgraded the company after the strong performance. Reason for the downgrade cited in the report is that HUL’s business will probably face headwinds from escalating competition (higher ad spends) in soaps and detergents going forward. Given this situation the high valuation of 29 times financial year 2013 profit is unwarranted, says the report.

[caption id=“attachment_206264” align=“alignleft” width=“380” caption=“HUL posted a net profit of Rs 763 crore, beating consensus estimates by 8 percent. AFP”]  [/caption]

HUL posted a net profit of Rs 763 crore, beating consensus estimates by 8 percent. Importantly the company posted its highest operating margin in the last eight quarters, thanks to lower spend in advertisement and lower material costs.

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Though the numbers have beaten estimates, volume growth of 9 percent was lower than the consensus estimate. HUL raising prices of its product helped the company post a higher sales growth of 16 percent and also added to margin expansion.

Lower volume growth, Citi says, might add pressure on the company to increase ad spend going forward. Dabur and Marico in their results had not shown any slowdown in ad spends, which in fact witnessed double digit growth while HUL’s ad spend increased only 7 percent. With competition likely to increase going forward, the company might have to resort to higher ad spends.

Another broking house Jefferies has also raised eyebrows over sustainable growth for the company which has been possible only because benign competitive environment allowed HUL to pass on price increases.

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Growth then assumes centre stage for HUL, as the company near the peak of its margin expansion cycle.

With markets picking up, money is expected to move to under valued sectors from over valued ones, which is one of the reasons why HUL did not participate in the January rally despite markets moving 11 percent higher. Non participation is likely going forward too.