Unilever India to Return Cash as Growth Hits 10-Year Low

  • Hindustan Unilever to give back $324 million to shareholders
  • Company's net income falls 22% in quarter ended Dec. 31

Hindustan Unilever Ltd. plans to return 21.9 billion rupees ($324 million) to shareholders, signaling a lack of investment options at India’s largest consumer goods company, as revenue from selling shampoos, soaps and detergents grew at the slowest pace in more than 10 years.

Local sales of Dove soaps, Surf detergents and Fair & Lovely skin cream grew 3.3 percent in the three months ended Dec. 31, India’s largest consumer goods maker, said on Friday. That’s the slowest growth since at least 2005, according to company filings. Net income fell 22 percent in the quarter, according to the filings.

Slowing growth at the unit of Unilever Plc belies government data that shows economic expansion in India is outpacing China’s. Demand in the South Asian nation’s villages, which was increasing at about 1.5 times the rate of cities until two years ago, has slowed “significantly”, and that has had an adverse effect on the entire consumer goods industry, Hindustan Unilever Chief Executive Officer Sanjiv Mehta said.

“We are sitting in a deflationary environment,” Chief Financial Officer P.B. Balaji said, referring to the drop in commodity prices that has led companies to cut prices of most products. “Price growth is a challenge.”

Competition in the consumer goods sector has increased substantially in the past year, and that combined with the pressure to cut prices makes it “very difficult” for entrenched companies to expand the market, said Naveen Trivedi, an analyst at Trust Financial Consultancy Services Pvt. The fact that they are returning money to shareholders suggests there are few avenues to invest it, including in acquisitions, he said.

Excess Money

Hindustan Unilever will seek court approval for the cash transfer, and will then decide whether to return it as a dividend or in some other form, Balaji said. The payout, which comes three years after it increased royalty payments to its parent, should be complete within six months to an year, he said. Parent Unilever, with its 67.2 percent holding in the Indian company, will get the biggest share of the cash.

“Only after we forecast our current needs, foreseeable future needs, business plan, we then realized this is just pure surplus cash,” Balaji said. Returning the money to shareholders is “sign of confidence that we can run the business quite comfortably.”

Hindustan Unilever’s shares fell 2.8 percent to 804.25 rupees in Mumbai, the biggest drop since Aug. 24. Net income fell to 9.71 billion rupees in the quarter ended Dec. 31, missing analysts’ estimate of 10.4 billion rupees. That’s the biggest drop in profit since the three months ended June 2013. However sales volume, considered the most important metric among analysts, grew 6 percent partly because the company passed on the benefit of lower commodity prices to buyers, Balaji said.

India’s government reported growth accelerated to 7.4 percent in the three months through September from 7 percent in the prior quarter. Mumbai-based brokerage Ambit Capital Pvt. estimates a deceleration to 6 percent from 6.3 percent. Factory output recorded its first contraction for 2015, shrinking 3.2 percent in November, data showed Tuesday.

“About 85 percent of the capital expenditure in India is by the private sector and we’re not seeing much of a pick up,” said Saurabh Mukherjea, chief executive officer of institutional equities at Ambit. “The banking sector is under stress. The economy is losing steam.”

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