Get Leveraged

While HLL's restructuring efforts will take a while to yield results, a possible economic upturn offers a ray of hope

Size does matter. Ask M S Banga (or "Vindi" as he is more famously known), chairman of the Rs 11,000 crore Hindustan Lever (HLL), who, along with his army of talented personnel has been battling extremely unfavourable business conditions to continue maximising stakeholder value. In the past two years, a general economic slowdown and sluggish rural demand have turned into major obstacles to HLL's growth.

Besides, its Rs 4,285 crore soaps and detergents business -- which contributes 39 per cent to net sales -- has almost reached saturation in terms of market penetration. Little surprise then, HLL has been fighting a losing battle to shore up topline in recent years. Nonetheless, it's done a fine job in maintaining high profitability levels.

 

Empowering brands: To do that, HLL chalked out a three-pronged strategy in the beginning of FY01, which involved driving growth in the fast-moving consumer goods (FMCG) business, especially home and personal care (HPC) products by focusing on power brands; improving profitability of the foods business; and restructuring the non-FMCG businesses. And if overall performance of the company in FY01 are any indication, the strategy seems to have worked in their favour.

While topline has grown by 2.8 per cent on a like-to-like basis in FY01, power brands charged ahead with a 6.5 per cent rise in sales. The overall FMCG business grew by five per cent, driven by a 9.2 per cent growth in the HPC business. And while sales growth in the foods business remained flat, portfolio restructuring and cost reductions improved gross margins by 500 basis points.

In addition, while certain businesses of Lakme Lever, Lipton Exports, International Bestfoods and Aviance were integrated with the company, the non-FMCG businesses of animal feeds, nickel catalysis, and adhesives were transferred out.

Down but not out: HLL appears to have succumbed to the general market sluggishness in the first quarter of FY02, with the FMCG business declining around five per cent. What's more, HLL's power brands also fell in line with the overall drop in the FMCG business. Says an analyst: "The topline fall can be mainly attributed to stock rebates and inventory correction led by the company's supply chain initiatives".

Inventory correction coupled with down-trading by regional players also caused a 4.3 per cent decline in the soaps and detergents segment last quarter. In addition, a decline in Breeze and Lifebuoy franchises caused a fall of 6.1 per cent in the personal wash category, while the fabric wash category also suffered a decline of 5.2 per cent.

Points out D Sundaram, director - finance: "Selected small players have short-term opportunities in a market that is downtrading. However, HLL continues to focus on quality, consumer knowledge and intimacy and technology. It is confident that these market activities will bear fruit in time".

With the Fair & Lovely franchise continuing its growth trend, the skin care category registered a 6.6 per cent growth in the last quarter. However, the overall personal products segment declined 7.8 per cent.

Says an analyst: "Besides lower sales, the stock rebating exercise has impacted growth". This year, analysts expect the personal products business to grow by at least 10 per cent. More so, because the stock rebating exercise has resulted in an average price reduction of seven per cent -- and this is expected to push up volumes. Besides, penetration levels in this segment are considerably lower.

Its foods business (7.2 per cent of net revenues) declined by nearly seven per cent to Rs 161.59 crore last quarter. Its culinary products segment (jams, ketchup, squashes) is expected to remain under pressure too, and likely to report flat to slightly negative growth in FY02.

However, Dalda Activ, and the launch of Dalda Classic and flavoured spreads is expected to keep volumes growing by 18-20 per cent. Overall, analysts expect revenue growth from the foods segment to remain flat for FY02.

A shrinking of the packet tea market (6.4 per cent in FY01) also resulted in beverages sales declining further in the last quarter (11.45 per cent to Rs 346.51 crore). But with a focus on power brands such as Taj Mahal, Taaza, A1, Lipton Ice and Bru, analysts expect volumes to stabilise this year. In addition, rising tea prices could help thwart low-priced competitors to some extent.

Reap as you sow: In the first quarter of this fiscal, net sales dipped nearly 10 per cent to Rs 2,380.66 crore. Almost half of this decline was accounted for by a 31 per cent fall in exports, chiefly because of the discontinuation of non-value added traded exports.

However, the exercise helped HLL shore up margins