HUL May Have To Hike Prices As Parent Raises Operating Margin Target
Hindustan Unilever Ltd. will have to increase prices to meet the 20 percent target for operating margins set by its parent Unilever Plc, analysts said. HUL's operating margins stood at 16.3 percent in the quarter ended December last year.
Unilever announced a restructuring after the Anglo-Dutch consumer goods giant faced an aborted takeover bid from Kraft Heinz Inc. The company said it will cut costs, sell its spreads business, buy back shares worth 5-billion euros and target a 20 percent operating margin by 2020, up from 16.4 percent last year.
Unilever is increasing its focus on expanding margins and HUL is likely to follow suit, said Sanjay Manyal, senior research analyst at brokerage ICICI Direct. Globally, spreads is estimated to be a low-growth and low-margin business and exiting it shows Unilever's commitment to focus on margins, he said.
Also Read: Kraft's Failed Bid Jolts Unilever Chief Into Protective Revamp
Unilever is also combining the foods and refreshments businesses and increasing its savings from brand and marketing spend from 1 billion euros to 2 billion euros, showing its seriousness towards growing earnings from the segment.Sanjay Manyal, Senior Research Analyst, ICICI Direct
Besides raising prices, HUL will have to increase its sales growth, which has been lagging for the past few quarters, said Sageraj Bariya, vice-president and analyst at brokerage East India Securities. The company also needs to focus more on premium products to improve its margins, he said. “If this happens, it may not be difficult for the company to achieve 20 percent EBITDA margins by 2020.”
Unilever can boost operating margins by improving cost efficiency, said Sachin Bobade, senior research analyst at brokerage Dolat Capital. The company will have to increase prices in India and globally to hit 20 percent margins by 2020, he said.
Unilever announced that it will combine its foods and refreshment business to unlock future growth and faster margin progression. The Anglo-Dutch FMCG major will also raise dividend by 12 percent.
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