AT THE BEST of times, running a consumer-goods company in Nepal is a tricky business. The landlocked country depends on India for most of its supplies, its politics are volatile and its infrastructure is laughable. For Unilever Nepal Limited (UNL), which sells soaps, shampoos, ice creams and so on, these are not the best of times.
The firm’s results for the first quarter made for grim reading. Revenue fell by 11%. Pre-tax profit collapsed by 43%. This was one of its worst performances in years. The story of how a stellar company found itself in a lather holds lessons for businesses far beyond the Himalayas.
To understand UNL’s woes, look past the top-line figure. The real damage is in the margins. The firm’s gross-profit margin—the share of revenue left after accounting for the direct costs of making its products—fell by almost eight percentage points, to 46.6%. Such a sharp plunge points to a brutal squeeze. The company could not raise prices enough to offset its own soaring costs, because its products were undercut by a flood of cheaper imports, mostly from India. At the same time, its net-profit margin, what remains after all other expenses, fell from 23.4% to 15%. Higher logistics, advertising as well as interest expenses all took a bite.
The immediate cause of this pummelling is political. Nepal has been rocked by protests, transport blockades and vandalism. This is a particular problem for a firm like UNL, which relies on an extensive distribution network to move goods from its factories to small shops across the country. The disruption struck during what should have been the festive season, a period of peak demand. With roads blocked, inventory piled up. Shopkeepers could not restock. Consumers, facing their own economic pressures, tightened their belts.
Making matters worse, the political ructions have amplified Nepal’s economic frailties. The country depends on India not only for supplies but also for transit. When relations are fraught, as they have been, trade suffers. A weak Indian rupee against the American dollar has made Nepali imports more expensive. But it has also made Indian goods relatively cheaper in Nepal. This has opened the door for “grey imports”, products brought in through informal channels, which undercut legitimate businesses on price. UNL’s soaps and detergents, long premium brands in the Nepali market, suddenly look expensive next to these alternatives.
Faced with such external shocks, a firm’s internal strengths matter. UNL is no fly-by-night operation. It is part of the global Unilever empire, with a portfolio of trusted brands and a balance-sheet to match. Its liquidity position remains robust. The firm’s current ratio, a measure of its ability to pay short-term obligations, stands at a comfortable 2.5. Its cash reserves increased by more than half over the past year, providing a useful buffer. This financial health gives it staying power that local rivals cannot match.
Management is responding as best it can. The firm speaks of “protective optimisation”, a corporate term for battening down the hatches. It is trimming costs, building brands digitally and creating contingency plans for its distribution. It is also lobbying the government to curb the grey imports that are distorting the market. Yet these measures can only accomplish so much. The firm’s fate is tied to the political and economic health of Nepal itself. No amount of internal streamlining can fix a broken road or calm a political protest.
Investors seem to be betting that this too shall pass. UNL’s share price has not fallen off a cliff. It trades near the middle of its 52-week range. This relative stability, in the face of a 43% year on year drop in earnings per share, seems puzzling. It results in a lofty price-to-earnings ratio of 36. The explanation lies in the firm’s privileged position. The market for its shares is exceptionally illiquid—on average, a mere 43 shares change hands each day. It is also seen as a blue-chip stock, a proxy for the Nepali consumer story. Shareholders appear to be treating its current troubles as a temporary disruption, rather than a permanent slump.
That faith will be tested in the coming months. Nepal’s political winds are fickle. Its infrastructure remains a constraint. The price advantage of Indian imports may persist. For UNL, the path to recovery depends on a return to stability on the streets and a rebalancing of the economic relationship with its giant neighbour. The company has the brands and the financial heft to survive a prolonged downturn. But thriving is another matter. Its recent results are a reminder that for even the best-run firms, the business environment can be the most important variable of all. ■
