The 33.4 per cent growth in Hindustan Unilever's (HUL) profits before exceptional items, and its expanding margins for the latest December quarter are a demonstration of the clout that it wields in the FMCG market.
Of the 16.5 per cent growth in sales, just 9 per cent came from increase in underlying volumes.
Pricing power
HUL's profits from its largest soaps and detergent segment more than doubled compared to a year ago, driven mainly by price increases on key brands. That is a sign of pricing power – the company's ability to pass on raw material price increases to consumers. The continued double-digit sales growth across segments (home, personal products, beverages and foods all grew by 11-14 per cent) despite this, suggests that consumers have taken these price increases in their stride.
Aggressive adspend cuts
HUL has also continued to cut back substantially on its advertising and promotional expenses. Adspend as a proportion of sales fell to 11.8 per cent in the December 2011 quarter from 14.8 per cent in a year ago period. Even though other key items of cost – raw materials, employee expenses – rose over a year ago, the savings on adspend more than made up for it. Operating profit margins for the December quarter were at 16.5 per cent, a 2 percentage point expansion over a year ago.
As a dominant player in soaps, detergents and personal products, HUL has been able to dictate the trend in adspends. Most FMCG makers of soaps and detergents have also soft-pedalled on advertising spends in recent quarters.
HUL's raw material costs already show a moderation relative to sales compared to three months ago. Materials consumed as a proportion of sales (included traded goods) has fallen to 52.5 per cent this quarter, from 54.4 per cent in the preceding September 2011 quarter.
If raw material costs soften and the rupee begins to strengthen, HUL may manage to hold on to its price-line on key products, to keep its profits expanding strongly.