FMCG major Hindustan Unilever 's third quarter net profit jumped 17.9 percent year-on-year to Rs 1,252 crore, mainly led by income from land sale.
The bottomline came in higher than expectations of Rs 1,091 crore while the topline missed forecast, which was estimated at Rs 7,963 crore. Revenue grew by 7.6 percent. The company also disappointed on volume growth front, which stood at 3 percent, much lower compared to forecast of 5-6 percent and 4 percent in Q3FY14.
Naveen Kulkarni, Co-Head of Research at Phillipcapital said the overall numbers look a bit disappointing. He said the quarter was anyways not expected to be strong due to lot of promotional activities. However, he expects Q4 should make up for the reasonably slower Q3 on the back of severe winter.
Suruchi Jain, Equity Research Analyst at Morningstar India, said HUL has been overvalued for a very long time. From a short-term perspective, people should definitely stay away from the momentum trading that is currently happening in the stock. Fundamentals are not driving the stock price and when that happens, its multiples have expanded much beyond what fundamentals demand. So, we would definitely stay away from buying the stock from a short-term perspective.
Below is the transcript of Suruchi Jain and Naveen Kulkarni interview with CNBC-TV18's Sonia Shenoy, Pragya Bhardwaj and Senthil Chengalvarayan.
Sonia: After hearing what the management had to say how do you approach HUL because clearly the market has been over optimistic as far as the impending margin gains are concerned, but this time none of that has played out. What would your opinion be?
Jain: For a long time we have been saying that HUL like Marico will pass on the margin gain benefit to the consumers in order to gain better market share as well as better volume growth in the future. So, it has played out as we had expected. So, the concern on that strategy is definitely that will they enter a pricing war like they did in 2009-2010 because what happens is in the detergents and the soaps category they compete very closely with a lot of other multinationals and with HUL taking the lead essentially everyone could go down that path and compete away a lot of the profits that otherwise could sit on both their books.
Of course the other way to look at it is that in order to make more consumers spend and increase volumes all competitors will have to do that to get more and more consumers into the basket. So, it is a double edged sword and they need to use it wisely and to the extent that they do that volume growth should come back online and of course this quarter even in terms of overall profitability despite the margins looking really good on a segment wise basis just the growth has really been disappointing as a result if you actually take out the exceptional line item the profits are actually much down compared to last year.
Sonia: So volume growth is disappointing but margins have still held out. So, just to simplify this what would you recommend on the stock now after the five percent downtick?
Jain: We have been saying that it is overvalued for a very long time and we continue to think it is overvalued. From a short term perspective people should definitely stay away from the momentum trading that is currently happening in the stock. Fundamentals are not driving the stock price and when that happens its multiples have expanded much beyond what fundamentals demand. So, we would definitely stay away from buying the stock from a short term perspective.
Sonia: The prima facie numbers look weak on the operational front but what is your initial take?
Kulkarni: Yes, I agree the numbers are weak on the operational front, three percent volume growth is significantly lower than what we were estimating in the range of around 5.5 percent and EBITDA number is of course much lower than what we were expecting at around Rs 1,500 crore. So, overall the numbers seem to be disappointing.
Sonia: What would you do with the stock at this juncture because it is now selling off quite bit down about 4 percent?
Kulkarni: At these levels the stock will correct a little bit. In any case we were expecting this quarter not to be particularly strong because the base had a lot of promotional activity. For example in the personal care segment the relaunch of Fair & Lovely was in the base quarter. Also in the oral care category there was lot of promotional activity because of which the base was little higher. So, volume growth on that base has been a little disappointing.
Pragya: Apart from the factors that you have highlighted, do you think any kind of miss in the winter sales because that is a high margin product for the company and personal product segment has actually disappointed quite a bit in its overall performance. Do you think that will be one of the reasons for this kind of absolutely dismal volume growth which the company has reported?
Kulkarni: That is what I am saying. One is the base had some bit of promotional activity and secondly the winter has been late in the Northern part of India. Winter onset happened I would say in second half of December. However now the winter has been pretty severe so probably the Q4 numbers should make up for the reasonably lower Q3 numbers.
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