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Three things to learn from HUL result
Some companies dominate the sectors they belong to. Their earnings are thus looked upon as a 'bellwether' - acting as a reflection of the overall sector's performance. For the Fast-Moving Consumer Goods (FMCG) sector, it is Hindustan Unilever (HUL).
The consumer goods company recently announced its financial results for the quarter ended September 2014. Shares dropped about 5% - the most in nearly four years - after results failed to meet expectations. What's more, it indicates that outlook for the company as well as the sector remains negative.
Here is what the results indicate about the outlook of the FMCG sector:
Growth in the volume of sales is an important metric for FMCG companies. It indicates demand for goods. HUL has been posting a marginal 4-6% growth in volumes the past few quarters. This quarter too, it reported a 5% growth. The management further suggested that this is expected to continue in the coming quarters. This indicates that the demand scenario remains poor and will continue to remain so.
Rise in input costs:
A company's profits depend not only on its sales and revenues, but also its costs. Profits will fall even if revenues rise in case its costs increase. This is why analysts prefer to look at the growth in a company's margins - profits as a percentage of revenue. This has been the case with HUL too. A rise in raw material prices along with an increase in excise and income tax rates have impacted the company. This has affected many other companies in the sector. However, with prices of fuel reducing globally as well as a fall in inflation, input pressures are likely to ease in the near future. This could mean margins may improve in the quarters to come.
Shares of Hindustan Unilever fell 5% on the day of the result announcement, and around 2% the day after. Shares of other FMCG companies too fell on worries about the negative outlook. So far for the year, the BSE FMCG index has underperformed the benchmark Sensex index. While the Sensex jumped 26%, the FMCG index gained nearly 13%. This is likely to continue as valuations continue to remain high. Investors are paying as much as Rs 39 for each rupee earned by FMCG companies. This is called the PE or Price-to-Earnings ratio. In contrast, the Sensex's PE ratio is at 18.5-levels. As the growth forecast remains muted for FMCG companies, the shares too are likely to remain lacklustre.
The HUL results show demand environment remains poor. This is especially so in the rural areas, where consumption in terms of volumes has actually fall in the May to July period, according to data from market research firm IMRB. "Rural FMCG consumption volume declined 7% from May to July, against a fall of 1% in the year-ago period," a Business Standard report said quoting the IMRB report. In contrast, consumption has recovered in the urban areas. Volumes grew 7% in the period, compared to a 12% fall last year.