• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Aarati Krishnan

EARLY indications of a recovery in rural demand and some favourable Budget proposals have catapulted the Hindustan Lever stock to its 52-week high over the past week.

After appreciating by around 14 per cent over the past two weeks, the stock now hovers at Rs 262, at a stiff price earnings multiple of 37 times its 2001 earnings. The price earnings multiple makes it the most expensive stock in the FMCG sector. Given the company's sedate growth prospects, the stock is unlikely to continue to generate returns of this magnitude in the near future.

Though the company stands to benefit both from an improvement in rural demand and from some of the changes in tariff levels in the Budget, the current price appears to have already captured the impact of these developments. Investors can use this opportunity to book profits in the stock. Given the distinct improvement in HLL's fundamentals, re-entry may be contemplated at lower levels.

Hindustan Lever has closed the financial year 2001 with a 2.8 per cent growth in sales and a 10 per cent growth in comparable net profits (after netting out the effect of restructuring charges, exceptional income and changes in the business portfolio). Both parameters deteriorated distinctly in relation to 2000. Of particular concern is the fact that the bulk of revenue growth has come from HLL's traditional cash cows, home and personal products. The foods business, on which HLL has been pinning its hopes for future growth, has managed just single digit or negative growth rates during the year.

There are a couple of factors that could work to HLL's advantage. In 2002, HLL will probably benefit from the cascading impact of the improvement in rural disposable incomes, arising from the surge in agricultural output in 2001. Moreover, HLL's decision in 2000, to focus on 30 "power" brands out of its portfolio of 110 had clearly begun paying dividends in the second half of 2001. Not only did it manage volume growth rates ahead of the markets in its home and personal-care business, it also made market share gains at the expense of its smaller competitors. The cut in excise duties on cosmetic products in the Budget and the reduction in import duty on key inputs such as industrial oils could bolster HLL's profit margins or at least help it boost offtake through selling price reductions. The fact that HLL hiked selling prices on some of its key brands just before the Budget may also bolster realisations to some extent.

However, even after factoring the positive impact of all these factors, it appears unlikely that HLL will be in a position to sustain a topline growth of over 10-15 per cent on its present base. Its large size and intensifying competition in most FMCG categories are likely to act as key impediments to HLL in sustaining the impressive growth rates of the past 10 years. Investors may thus use the recent appreciation in stock price as an opportunity to lock into higher returns, when they are available.

Send this article to Friends by E-Mail

Stories in this Section
Telecom: A breather

Copyright © 2002, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line