UN Unilever NV

Hindustan Unilever Ltd. (500696.BY) Tuesday missed market expectations as its third-quarter net profit slipped 1.7% on year because of high raw material costs, which will now force the company to raise prices to protect profitability.

India's largest consumer goods maker by sales has been forced to sacrifice profitability to grow sales volume over the past several quarters after it found that consumers were opting for cheaper brands from its rivals.

The strategy seems to have worked as the company has now reported double-digit percentage sales volume expansion for the fourth quarter in a row, signaling it has been able to sustain demand for its products such as soap bars and detergent packs.

The Indian unit of Unilever PLC (UL) reported a 13% expansion in sales volume at its local consumer goods business for the quarter through December. In the year-earlier quarter, it had reported a 4.6% rise in sales volume.

Hindustan Unilever's bottom line didn't, however, benefit from the strong demand as high raw materials costs ate into its operating margin.

The company said net profit fell to INR6.38 billion from INR6.49 billion a year earlier. Sales rose 12% to INR50.27 billion from INR45.04 billion, it said in a statement.

Operating margin in the third quarter shrank 320 basis points from a year earlier, the statement said. It didn't elaborate.

The average of estimates in a Dow Jones Newswires poll of 10 analysts was for net profit at INR6.50 billion on sales of INR50.77 billion.

The results pressured the company's shares, which closed down 5.5% at INR281.65 in a Mumbai market that finished 1.0% lower.

Analysts say consumer goods companies such as Hindustan Unilever don't have much space to raise product prices given the highly competitive market in which they operate. Though the company raised prices of some soap and detergent brands earlier in the fiscal year, that wasn't enough to fully offset the increase in raw material costs as well as higher expenses on advertising, promotion and packaging.

Hindustan Unilever, for its part, said it doesn't see an immediate let-up in either the competitive intensity or input cost inflation. But said it would act to protect its operating margin.

"There will need to be more price increases going forward given the outlook that we have on commodity cost inflation. We'll do so in a judicious manner," Chief Financial Officer R. Sridhar told reporters on a conference call.

He didn't elaborate on when or how much or in which categories the company will raise prices.

Cost of goods sold went up by 220 basis points as a result of a steep rise in raw material costs, especially in commodity sensitive categories, the company said.

Prices of agricultural inputs, which typically soften after monsoon rains, remained firm in the October-December period, while crude oil-linked input prices moved up.

Total costs rose 16% to INR44.59 billion from INR38.31 billion, while raw material costs increased 19% to INR19.42 billion.

Advertising and promotion spending grew 17% to INR7.43 billion.

-By Rumman Ahmed, Dow Jones Newswires; 91-9845104173; rumman.ahmed@dowjones.com

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