Our Bureau
Kolkata, Aug. 12 Hindustan Unilever, the biggest listed FMCG player, which has turned ex-dividend recently, today finished in the green while the benchmark index closed in the red. The rupee one stock finished at Rs 243, up around 0.60 per cent, while the BSE FMCG Index gained 0.69 per cent.
There were unconfirmed reports that the company might raise prices of its tea brands. However, analysts were not sure whether a price rise would actually result in greater profitability. According to Ms Deepti Singh of Parag Parikh Research Team, consumer response to recent price hikes in some products run the risk of hurting the topline.
Tea marketAccording to a recent note by Indiabulls, a sustained price war is a downside risk as it might further erode margins. The note, however, mentioned that the beverages segment revenue grew 16 per cent in the June quarter, year-on-year, but dropped by 2.2 per cent quarter-on-quarter.
However, volumes grew as both tea and coffee gained market share annually as well as sequentially and EBIT margin improved remarkably to 14.6 per cent after a poor 11.6 per cent last quarter. Tea and coffee accounted for over 65 per cent of the company’s foods division’s revenues. HUL is stated to command around 22 per cent share in value terms in the domestic tea market.
The Parag Parikh analyst said: “While we are impressed by the HUL’s topline growth, the difficulty to replicate the same in the bottom line makes us cautions on raw material prices. However, the recent correction in crude price is comforting on the input price and margins expectations.”
Increasing competitionIndiabull estimated that the total increase in expenditure on the consumption of raw/packing materials in the June quarter was controlled to 22.9 per cent year-on-year.
However, purchases grew sharply by 30.9 per cent year-on-year on account of higher material and trading goods costs.
The packaging and distribution cost also shot up, while staff cost rose by 25.2 per cent year-on-year. The company spent heavily on advertising, which is reflected in the volume growth and the increasing market share of premium products.
It said HUL seemed to be increasing its inventory stocks in order to cushion the impact of the input cost rise.
Mr Rajesh Agarwal of CD Equisearch said apart from cost pressure, HUL is also feeling the heat of increasing competition. The recent aggressive entry of ITC into home and personal care segment has resulted in HUL losing around 1-2 per cent market share. Additional expenditure for this segment would erode margins further, it is apprehended.
According to Mr Agarwal, almost all sectors are currently affected by pressure on the margins.
“In this scenario, HUL is being considered by risk-averse investors as a relatively safe bet because of its size and clout in the market place.”
