Companies reporting double-digit profit growth have been quite rare so far this quarter. That's probably why HUL's September quarter results saw its stock price being marked up by an unusual 7.5 per cent to a new yearly high.

The sales growth of 18 per cent managed by HUL in July-September 2011 was on expected lines. It was underpinned by a 9.8 per cent volume growth, with the rest coming from price increases. The surprise element came from the 22 per cent jump in HUL's net profits, a very healthy number after the almost flat profits reported by smaller rivals such as Godrej Consumer and Colgate Palmolive.

Margins expand

HUL's healthy profit growth didn't receive help from “Other income” or extraordinary items. In fact, HUL's operating profits, before exceptional and other income expanded by 30 per cent year-on-year. The expansion in HUL's operating profit margins from 15.1 per cent in the same quarter of last year to 16.1 per cent this September quarter stands out given that most companies in the consumer space have faced a squeeze on margins this quarter.

Adspend cuts

The profit margin expansion came from three key sources. One, though the company's material costs continued to rise (54.3 per cent of sales this quarter from 50.9 per cent last year), it made up by snipping away at advertising and promotional expenses (11.8 per cent of sales instead of 13.8 per cent). Two, the company also made sizeable savings (amounting to 2.7 per cent of sales) in “other expenditure”. Three, the company's product mix continued to improve with both its large cash cows — soaps and detergents and personal products — showing margin improvements. While the company economised on ad spend and took price increases in soaps and laundry, the continued trend of ‘premiumisation' probably helped margins for personal products. These two segments brought in 86 per cent of HUL's profits before tax for the quarter.

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