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Aarati Krishnan

IF you consider the odds that have been stacked up against Hindustan Lever Ltd (HLL), the growth numbers that the FMCG giant has notched up for the quarter ended March 31, 2003 appear reasonable.

While the numbers suggest that HLL is holding up under pressure, yet they do not hold out much promise that earnings will move into a higher trajectory in future. In terms of sales, many of HLL's power brands have managed to beat sluggish markets to post double-digit growth rates.

But for all this, HLL's sales grew by a mere 1.2 per cent for the quarter. As for profits, HLL has managed an 8.2 per cent growth in the net profit despite stagnant sales. But a surge in "other income" and a fall in adspend appear to be the main contributors to profit growth, rather than sustainable factors such as savings on manufacturing costs.

Pricing pressures weigh on sales growth: Pricing pressures in the FMCG market has been quite high over the past quarter, as shrinking offtake and aggressive regional competitors have kept promotional and competitive activity high. Seen in this light, the 5.6 per cent sales growth that HLL has managed for its home and personal care businesses is impressive. It also appears that HLL is in the last leg of its attempts to weed out low margin exports - export turnover is back to a 4.6 per cent growth rate in the March 2003 quarter. But much of this good work was undone by the foods business, which continued to shrink, registering a 9.8 per cent drop in sales for the quarter.

Good volumes, but lower realisations: HLL's performance in the home and personal care segment is backed by some impressive volume growth from "power" brands such as Lifebuoy, Pears, Wheel and Pepsodent, despite shrinking category offtake. Home and personal care sales grew by 11 per cent in volumes for the March 2003 quarter boosted by high growth rates in hair care, skin care, oral care and laundry.

However, the impressive volume growth in the power brands has failed to push overall sales growth into a higher trajectory. In some categories, HLL has probably had to sacrifice selling prices for higher volume growth. This may not be a negative factor, if the price cuts have a lasting impact on usage or penetration levels for products. But whether this has happened will be clear only over the next few quarters. In the foods business, unfavourable commodity prices appear to have ensured that volume growth has not trickled down to sales value. Overall sales growth may also have been impacted by sluggish primary sales (sales to dealers, stockists) towards the end of the quarter, due to the expected transition to the VAT regime.

Slower margin expansion: But the most disturbing facet of HLL's financials for the quarter is the indication that the company may be nearing the end of its tether on cost savings.

Until 2002, substantial savings on raw material and procurement costs helped HLL keep up a robust pace of profit growth, despite a stagnant topline.

But for the March 2003 quarter, key items of cost such as purchases and staff costs have actually increased at a higher rate than net sales.

If HLL still closed the quarter with an 8.2 per cent growth in net profit, this appears to be on account of a sharp (47 per cent) jump in "other income" and a cutback in adspend; rather than from cost savings on manufacturing.

Is HLL just taking a temporary breather before it unleashes its next round of belt-tightening exercises? Maybe. But if not, the March numbers suggest that a revival in HLL's earnings now depends more than ever, on factors external to the company.

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