The Hindu Business Line : Hindustan Lever: Book Profits

GIVEN the demanding valuations for the stock, investors can consider booking profits in the Hindustan Lever stock at current price levels. There are several encouraging aspects to Hindustan Lever's financial performance for the first six months of 2003. The trend of declining sales has been reversed, and sales growth has continued to improve, reaffirming the trend of the past five quarters.

The `power' brand strategy has perked up volume growth, even in mature brands, into robust double digits. And in the June 2003 quarter, the ailing foods business has perked up, with beverages returning to a positive growth, after a long spell.

Pale in comparison

Despite these improvements, with net sales expanding by just 3.2 per cent and profits (before exceptional items) growing by 10.5 per cent in the first half of 2003, it will be some time before HLL's growth numbers set anything like a scorching pace.

Growth rates continue to be out of sync with the demanding valuations for the stock, which now trades at a price earnings multiple of about 22 times its trailing 12-month earnings.

Recouping health

In the first half of 2003, HLL's net sales grew 3.2 per cent to Rs 4,904 crore. Net sales shrank 2.2 per cent in the corresponding previous period and sales growth improved across categories. Home and personal care registered 4.5 per cent growth in the first half of 2003, against 0.1 per cent growth in the first half of 2002.

Exports and other residual businesses registered strong growth rates of 11.3 per cent and 22.7 per cent in the first half of 2003, after negative growth rates in the first half of 2002. In a significant turnaround, the food business also improved its performance. It shrank 6.3 per cent in the first half of 2003.

Revival through focus

Two key factors are behind the revival in HLL's sales growth. One, by ridding its portfolio of low-margin businesses, the company has managed to shrink its formidable portfolio of businesses, to a more manageable size, with a sharper focus. Second, through its `power' brand strategy, it has systematically managed to push up growth rates for several of its large brands into a higher trajectory.

Higher growth rates in brands such as Lifebuoy, Pepsodent, Lux, and Nihar are evidence of the success of this strategy. Of late, this has also been combined with strategic re-alignment of selling prices at lower price points.

The re-launch exercise, which has been completed for most of the home and personal care brands, is now underway for the foods business. But despite the successes, sustaining a high growth rate will continue to pose a challenge for HLL.

Topline, not margin,

holds key

On the other hand, it is clear that HLL will have to increasingly focus on its topline for sustaining its earnings growth.

Operating profit margins have continued to expand in the first half of 2003, inching up by about one percentage point. But much of the rise in operating profits in the first half has been accounted for by the sharp fall in adspend.

With a couple of high profile relaunches just off the block, the cutback in adspend may not continue over the rest of the year.

Higher rural spending, after a good monsoon, continues to offer some hope for a recovery in key FMCG categories.