The Hindu Business Line : Hind Unilever: Healthy growth, but buyback terms may disappoint

BL Research Bureau Hindustan Unilever (HUL) has delivered healthy profit growth in the latest quarter after two successive quarters of disappointing numbers. Growth in sustainable profits (before exceptional items) has accelerated to 24.5 per cent in the June quarter from 13.9 per cent in the preceding quarter.

This is despite the fact that net sales growth slowed to 12.9 per cent, from 14.7 per cent in the preceding quarter.

A cutback in advertising expenses (after substantial increases in earlier quarters), more lucrative treasury operations and abating margin pressures have been key factors that helped the company improve profit growth. On the input cost front, an appreciating rupee and reduced import duties on chemical inputs probably helped offset the impact of rising palm oil prices on margins, helping HUL hold its operating profit margins steady this quarter, after earlier declines.

Reduced adspend also played a role in profit growth. But given the uneven phasing of promotional activity, there is uncertainty about whether adspends will continue to remain at low levels for the rest of the year.

Though its sales for the June quarter grew at a slower pace than before, the drivers continued to be fairly broadbased. Soaps and detergents, beverages and foods delivered strong double-digit growth, while personal products continued to disappoint. Going forward, the expansion managed by HUL in new businesses such as water will be closely watched as they hold the key to long term growth.

Terms of buyback

Though the earnings numbers have positively surprised the markets, the terms of the buyback announcement suggest that this may not deliver a material boost to stock valuations. With the buyback to be routed through phased open market purchases, HUL will be free to mop up shares at prevailing market prices until it exhausts the 25 per cent limit. This means that the maximum buyback price of Rs 230 indicated by HUL, will have limited relevance to investors.

With HUL earmarking Rs 630 crore to fund the exercise, the number of shares that can be bought back at Rs 230 is about 2.7 crore; representing a 1.24 per cent reduction in HUL’s equity base. The boost from this, to per share earnings, may not be significant.

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