Wooing The Consumer

Despite facing an uphill task achieving volume growth in its key product segments, Hindustan Lever managed an improved performance, a fact that explains the stock market's fixation with this stock. First half sales for HLL are up by 19.8 per cent against a 18.47 per cent growth in 1997. Despite lower growth rates in volume terms, ten per cent in the first half, its operating margin in the first half has increased to 13.76 per cent from 12.85 per cent. However, profit after tax (before exceptional items) growth is 31.7 per cent against the 40.6 per cent achieved in 1997. This is partly due to a Rs 15.03 crore amortisation charge in the first half which has increased its depreciation burden.

 

In volume terms, soaps and detergents grew only by 6 per cent, and beverages by 5 per cent which together account for 61 per cent of value sales. The consolation comes from personal products which has grown at 21 per cent in volume terms and accounts for 12.5 per cent of value sales. Thus, beefing up this segment by merging Pond's and acquiring Lakme makes eminent sense to enhance volume growth. HLL has made up for the lower sales growth by resorting to selective price increases, a task made easier by its formidable market shares in these segments. It has also introduced 20 new products and 18 new relaunches, which enables it to move up the price ladder.

Apart from leveraging on size, its foray in to popular foods is a sure way to hedge against a possible slowing down of growth in the new segments as they mature. This shows up in the confidence of its senior management who expect this business to be the single largest contributor to the business eventually. The business requires considerable amount of funds, but with a liquid asset kitty of Rs 1,000 crore, it is not a major worry for HLL. Since its capital investments are minimal at the moment, with third party manufacturing, a comfortable funds position enables it to use flows from existing businesses without adversely affecting them. Pond's performance too has to be factored in, as the merger is with effect from January 1, 1998. Pond's net sales have fallen marginally due to higher in-house production leading to higher excise duties. Lower exports sales has led to lower growth rates in leather exports. Other expenditure incurred on outsourcing has come down, leading to an improvement in its operating profit

margin to 13.76 per cent in the first half from 12.85 per cent in the previous corresponding period.