Emerging Market Currency Fall Leaves Unilever Shaken FMCG giant issues profit warning for July-Sept SUDESHNA SEN & SAGAR MALVIYA LONDON | MUMBAI Unilever announced a surprise profit warning for the July-September quarter and blamed it on weakening currencies in emerging markets such as India, triggering a slump in its stock and pointing to concerns over the performance of local unit Hindustan Unilever. The company “has seen weakening in the market growth of many emerging countries in quarter three and now expects underlying sales growth of 3-3.5% in the quarter”, Unilever said in a release posted on its website. “The emerging market slowdown has accelerated as a result of significant currency weakening. Developed markets remain flat to down.” While the expectation compares with 5% growth in the first two quarters, Unilever has previously said that business in emerging markets will be hit by worldwide economic weakness. Local subsidiary Hindustan Unilever (HUL), India’s biggest consumer goods company, had posted earnings that were below expectations in the June quarter with discounts and high-profile promotional campaigns not lifting sales by any appreciable degree. “There is a general slowdown across categories. We are witnessing a significant slowdown from early 2013 to the middle of 2013,” Nitin Paranjpe, managing director and CEO of HUL said at the time. Chief Financial Officer R Sridhar saw challenges persisting over “the next two-three quarters”. Little Immediate Upside for HUL HUL and its rivals have been battling economic gloom that has discouraged consumers from spending on all but essential items. Apart from aggressive advertising and price reductions of one form or another, they have also widened the focus on rural markets to pick up some of the slack in urban areas. But that hasn’t been enough to combat the slump in growth, inflation, high interest rates and a sliding currency. Analysts don’t see much of an immediate upside for HUL. “Lacklustre volume growth, increasing royalty, advertising and sales promotion (A&P) costs and tax rates are resulting in dismal earnings,” said Nitin Mathur, consumer research analyst at Espírito Santo Securities. “HUL has seen downgrades starting February and with deteriorating macros such as tapering growth, urban slowdown and questions on sustainability of rural growth, we don’t see any respite in the near term for the company.” In a recent note to investors, Anand Mour of ICICI Securities said that while the economic slowdown will impact HUL’s revenue growth, more worrying is the price surge in key raw materials used by the company such as crude palm oil and linear alkyl benzene, or LAB, which will adversely affect the company’s gross margins in the coming quarters. India’s GDP growth hit a decadelow of 5% in FY13 and sank to a fouryear low of 4.4% in the quarter to June, reflecting an economy that hasn’t shown any definite signs of revival. The news on the currency is, however, better. The rupee weakened 5% in the July-September period, but this includes a 9% recovery since hitting a record low of 68.80 versus the dollar on August 28. There are other auguries of an improvement over the next few months. The good June-September monsoon raises the strong prospect of another bumper harvest. That in turn will mean, besides a boost for the economy, more disposable income in the hands of farmers and benefits for consumer goods companies from a rural push. HUL controls nearly 15% of the total fast-moving consumer goods market worth Rs 2 lakh crore, with sales topping the combined sales of rivals including Procter & Gamble, Nestle, Colgate and Reckitt Benckiser. HUL’s presence in a range of daily consumption items such as soaps, shampoos and food also makes its performance a good proxy for consumer sentiment in India. Unilever Chief Executive Officer Paul Polman said he sees sales picking up later in the year. “We continue to grow ahead of our markets and expect underlying sales growth to improve in quarter four,” he was cited as saying in the release on Tuesday. “For 2013, we are still on course to deliver against our priorities of profitable volume growth ahead of our markets, steady and sustainable core operating margin improvement and strong cash flow.” Unilever has said developing markets will account for more than 90% of its annual sales growth this decade from around 57% of its 51 billion euros of annual sales now. HUL contributes 6.65% of its parent’s revenue. More than two months ago, Unilever raised its stake in HUL to 67.3% from around 53% for Rs 19,180 crore, highlighting its confidence in India’s long-term growth. Unilever will keep investing in emerging markets such as India even though growth is slowing, Reuters cited Chief Financial Officer Jean-Marc Huet as saying three weeks ago, pointing to the group’s increased stake in Hindustan Unilever as a long-term bet. “Yes, there is a slowdown in emerging markets, but if you’re in the consumer business, you should be where people are, and this is where aspiring consumers are,” Huet said at the Reuters Global Consumer and Retail Summit on September 10. “We continue to invest.” India is Unilever’s second-largest emerging market unit after Brazil. While China has not suffered from currency crashes, its growth is also below expectations. Unilever is set to announce third-quarter earnings later this month. The company’s stock tumbled on Tuesday, dropping 3-4% in trading in Europe and London, its biggest drop in two years. The stock has fallen 7% in the past three months. The stocks of rivals such as Nestle, SABMiller and Procter & Gamble also tumbled over similar fears on Tuesday. HUL, which fell 1.3% to Rs 619.30 on Tuesday, has risen 18% since January on the BSE compared with the 15% gain in the FMCG index. Source : Economic Times
Posted on: Wed, 02 Oct 2013 07:12:53 +0000
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