Sagarika Mukherjee, analyst, SBI Cap Securities, says that the volume growth reported in this quarter was 5 percent which is lower than the first half volume growth of 7 percent. We project close to mid single digit volume growth going forward and price-led growth in soaps and detergents category going forward.
Also read: HUL dips on poor Q3, new royalty pact; brokers cut rating
Below is the edited transcript of the interview.
Q: What is your view on Hindustan Unilever (HUL), would you be a little pessimistic like the Street and what would your trajectory on volume growth be going forward? What have you factored in terms of possible pickup?
A: The volume growth reported in this quarter was 5 percent which is lower than the first half volume growth of 7 percent. We feel that volume growth concerns in the personal product segment and especially in the discretionary segment will stay and they warned about it but now it is reflecting in numbers. We project close to mid single digit volume growth going forward and price-led growth in soaps and detergents category going forward.
Q: Can you detail why the volume growth was so much poorer than the already lowered estimates of the street and when you say mid single digit do you mean it will remain at 5 percent?
A: Yes, they have hiked the price of Fair and Lovely skin cream from Rs 7 to Rs 8 and they have faced volume slowdown.
Secondly, Dove sachets which were launched in last year were having a high base effect and because of high base effect they raised the prices. So the high base effect of last year again came in this quarter. So they registered very low volume growth. Wheel particularly was facing some strong competitive pressure. So these are some economy segment products which were facing volume pressures and if this is hitting them right now then it is definitely a long-term concern.
Q: What about the royalty impact, can you outline what sort of impact we could see on the P&L as well as on the EPS in the next few quarters?
A: The royalty will be effectively only from February 1, so royalty will hit P&L from fourth quarter onwards. However, the royalty currently is 1.4 percent of total net sales and for next year which is FY14 they will increase it by 50 bps so, basically 1.9 percent of total net sales.
According to this case one has to take off close to 4.5 percent from the EPS projections. As per our projections it was growing by 14.5 percent so if we exclude 4.5 percent it will grow about 10-10.5 percent which is significant because HUL is one of the lowest earnings growth company in the sector. So definitely that is the negative sentiment which is hitting the stock right now. In the next five years they will raise it from 1.4 percent to 3.15 percent.