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If the stock markets seemed quite happy with the flat profits and 13.5 per cent sales growth that made up Hindustan Unilever's (HUL) reported numbers for the latest March quarter, that was because of very modest expectations from the numbers in the first place.
What the company has delivered is an acceleration in its sales growth to its highest level in two years, with profit growth (before one-off items and taxes), at quite a respectable 12.7 per cent. HUL's operating profits have grown by 8.5 per cent and operating profit margins have been held at 13.2 per cent, only a tad lower than a year-ago.
Material costs hurt
A breakdown of the numbers show that rocketing prices of inputs from palm oil to plastic packaging did hurt HUL's profits; but the company made up through cost savings elsewhere. The company's material costs as a proportion of sales shot up from 51.4 per cent in the March 2010 quarter to 54.3 per cent in the March 2011 quarter.
This suggests that the selling price increases that HUL has been taking on soaps, detergents and other products over the past two quarters, haven't helped to fully pass on its rising costs to consumers.
However, HUL has managed to hold its profit margins mainly through ruthless cutbacks in other items of cost.
HUL's employee costs in absolute terms, have fallen year-on-year, despite its sales growing.
The company has also trimmed its adspend for the first time in several quarters. After setting aside nearly 14.7 per cent of its sales towards adspend in the first nine months of this fiscal, HUL drastically trimmed its ad budget to 12.7 per cent in the latest quarter.
HUL's decision to economise on adspend, if sustained, could signal that the company is finally confident of holding its turf, after its new launch and brand-building spree over the past couple of years. HUL's market share numbers over the next few quarters may show whether this is indeed the case.
In any case, the recent meltdown in commodity prices, particularly those such as palm oil and crude oil, may offer a respite on costs and margins in the months ahead.
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