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HLL: Profit down but picture looks better - Views on News from Equitymaster
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  • Feb 11, 2005

    HLL: Profit down but picture looks better

    Performance summary
    FMCG behemoth, Hindustan Lever (HLL), has declared its December quarter as well as full year 2004 numbers. The company has reported a marginal recovery in revenue growth during the quarter, which is a better performance as compared to over 3% dip in September quarter topline. For the full year, the company has reported over 2% dip in topline. But price competition took a big toll on operating margins of the company, both for the quarter, as well as for CY04. Consequently, profits have dipped by nearly 33% during the quarter (down over 32% in CY04).

    (Rs m) 4QCY03 4QCY04 Change CY03 CY04 Change
    Net sales 25,835 26,008 0.7% 101,384 99,270 -2.1%
    Expenditure 19,732 21,809 10.5% 81,617 84,896 4.0%
    Operating profit (EBDITA) 6,103 4,199 -31.2% 19,767 14,374 -27.3%
    EBDITA margin (%) 23.6% 16.1%   19.5% 14.5%  
    Other income 1,011 916 -9.4% 4,598 3,188 -30.7%
    Interest 323 323 0.0% 668 1,300 94.7%
    Depreciation 329 331 0.5% 1,248 1,209 -3.1%
    Profit before Tax 6,461 4,461 -31.0% 22,449 15,053 -32.9%
    Extraordinary income/(expense) (676) (238) -64.7% (325) (19) -94.1%
    Tax 838 886 5.7% 4,406 3,061 -30.5%
    Profit after Tax/(Loss) 4,947 3,337 -32.6% 17,718 11,973 -32.4%
    Net profit margin (%) 19.1% 12.8%   17.5% 12.1%  
    No. of Shares (m) 2201.2 2201.2   2201.2 2201.2  
    Diluted Earnings per share (Rs)* 9.0 6.1   8.0 5.4  
    Price to earnings ratio (x)         28.7  
    *(annualised), CY = Calendar Year            

    What is the company’s business?
    Hindustan Lever Limited is India’s largest FMCG company with a dominant presence in almost all consumer categories. The company’s turnover at Rs 100 bn is nearly half of the total branded / organized FMCG business in India. HLL's brand equity remains unrivalled in India. However, in the last couple of years, HLL has embarked on a major restructuring exercise focusing on improvement in quality of earnings, pruning brand portfolio and securing a viable future for its non-core businesses through JVs, or spin-offs. The effects of the initiatives had begun to show in the form of better margins. But 2004 sure seems different, with competition in its key business of soaps and detergents (44% of revenues) taking a huge toll on margins.

    Sales break-up
    (Rs m) 4QCY03 4QCY04 Change CY03 CY04 % change
    Domestic FMCG - HPC 17,661 18,257 3.4% 67,341 68,828 2.2%
    Domestic FMCG - Foods (incl. Ice Cream) 4,366 3,995 -8.5% 16,928 15,676 -7.4%
    a) Domestic FMCG 22,027 22,253 1.0% 84,269 84,504 0.3%
    b) Exports 3,147 3,202 1.8% 12,281 12,490 1.7%
    c) Others 661 554 -16.3% 2,647 2,276 -14.0%
    Total 25,835 26,008 0.7% 99,198 99,270 0.1%
    Discontinued business 0 0 - 2,186 0 -
    Total sales 25,835 26,008 0.7% 101,384 99,270 -2.1%

    What has driven performance in CY04?
    Overall sales view: The company's HPC business (personal products, soaps and detergents) saw a consistent growth pattern in the quarter (revenues up 3.4%). Volume growth was higher at 5%. The HPC volume growth continued its strength during the quarter on the back of enhanced brand investments. In beverages, Brooke Bond, which accounts for 90% of tea sales continued its strong momentum and grew by 15.5% during the quarter. But the overall beverage segment was down 7% owing to discontinuation of 'A1' brand. However, the foods business (including ice-cream) continued to record a dip (down 8.5% in 4QCY04). This was not only on the back of sale of Dalda to Bunge, but also owing to phased stock reduction in salt and culinary products and de-focussing of 'atta' in unviable geographies. The company's sales on a like to like basis were marginally up, both for the quarter and full year.

    Results on like to like basis
    (Rs m) 4QCY03 4QCY04 Change CY03 CY04 Change
    Net sales 25,834 26,008 0.7% 99,196 99,270 0.1%
    PBIT 6,324 4,298 -32.0% 20,410 14,549 -28.7%
    PAT 5,623 3,575 -36.4% 18,072 11,993 -33.6%

    HPC in detail: Soaps and detergents (45% of revenues) grew strongly. The company's laundry segment (Rin, Surf, Wheel) posted an 8% volume and value growth during 4QCY04. The company's share in 'powders' in volume terms went up to 29.8% in December quarter, up from 27.8% in March quarter 2004. The value market share growth however, was staid at 37.5%, as compared to 37.3% earlier. and as per the company statement, the segment's overall market share consolidated to 29.8% at the end of December (up from 27% earlier). The company's other big revenue contributor, personal product business (24% of sales) hardly saw any value growth. On the volume front however, HLL's shampoo volumes continued to grow strongly (by 30%) and the company has consolidated its market share in this segment to 51% (up from 48.7% in 2003). The company's 'Clinic' range led this growth.

    Segment revenue snapshot
    (Rs m) 4QCY03 4QCY04 Change CY03 CY04 Change
    Soaps and Detergents 10,953 11,480 4.8% 43,794 44,707 2.1%
    Personal Products 6,885 6,967 1.2% 24,102 24,722 2.6%
    Beverages 3,087 3,306 7.1% 11,842 11,946 0.9%
    Foods (includes Oils and Fats, Culinary and Branded Staples ) 1,080 622 -42.4% 6,025 2,851 -52.7%
    Ice Creams 157 131 -16.8% 934 889 -4.8%
    Exports 3,147 3,202 1.8% 12,281 12,490 1.7%
    Others (includes Chemicals, Agri, Plantations etc) 1,072 672 -37.3% 3,848 3,002 -22.0%
    Total Segment Revenue 26,381 26,380 0.0% 102,826 100,607 -2.2%
    Less : Inter segment revenue 81 60 -26.0% 371 254 -31.5%
    Net Segment Revenue 26,300 26,320 0.1% 102,455 100,353 -2.1%

    Operating margins: HLL's margins had seen a consistent uptrend since 1998 (see chart). The company's restructuring efforts were focused totally on right sizing its brand folio and on profitability. At the start of 2004, the HLL management had indicated that the company had attained the desired level of profitability and would now like to concentrate on topline growth. But price war in its key business of soaps and detergents, initiated by rival P&G, took a toll on this strategy. Margins have declined drastically for soaps and detergents segment during 2004 (PBIT margins shrunk from over 24.8% in 2003 quarter last year to 17.3% in 2004). Personal products too witnessed a 4% dip in margins 32.7%. HLL has had to push its products through enhanced advertising (ad expenses as a percentage of sales grew from 9.3% in CY03 to 9.8% in CY04).

    Net profit: The company's bottomline has been hit on many fronts this quarter. Apart from feeble margins, increased interest burden (owing to 9% debentures to shareholders) and lower other income contributed to the bottomline debacle. The company's final dividend declaration of Rs 2.5 per share (taking the total dividend for the year to Rs 5 per share) means that the company will be left with hardly anything to retain and allocate to its reserves this year.

    as a % of net sales 4QCY03 4QCY04 CY03 CY04
    Material consumption 36.2% 42.3% 38.0% 39.7%
    Purchase of goods 12.5% 12.8% 14.1% 14.8%
    Staff costs 4.6% 3.4% 5.7% 5.8%
    Advertising & promotions 8.6% 8.1% 9.3% 9.8%
    Other expenses 16.5% 18.5% 15.2% 16.8%
    Total expenditure 76.4% 83.9% 80.5% 85.5%

    What to expect?
    At Rs 156, the stock trades at 28.7 times CY04 earnings and market cap. to sales of 3.5x. The company's December quarter performance is better on an operating level as compared to the September quarter, which in turn was better than the June quarter. This is an encouraging sign.

    Over the last five quarters
      4QCY03 1QCY04 2QCY04 3QCY04 4QCY04
    Sales growth (YoY) -1.9% -0.7% -4.5% -3.3% 0.7%
    Advertising as % of sales 8.6% 8.7% 11.4% 9.6% 8.1%
    OPM (%) 23.6% 15.3% 12.4% 14.1% 16.1%
    Net profit growth (YoY) 2.9% -23.0% -45.8% -26.7% -32.6%

    In our view, the pressure on margins of both soaps and detergents and personal products is likely to ease going forward, with both P&G and HLL starting to hike prices of some of their brands. The company has re-iterated its focus on topline growth for 2005. While we believe this is largely possible, the quantum of such a growth is as yet unclear. The company has also indicated that they would prefer volume growth over profitability. With new entrants in the business (LG) and P&G's proposed entry into oral care, increased competitive pressure is a given. We will put up our detailed take on the performance in our Research Report for the company post our meeting with the management.

    The big picture…
      % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin growth (basis points)
    Soaps and Detergents 44.4% 2.1% -28.8% 17.3% (751)
    Personal Products 24.6% 2.6% -8.7% 32.7% (402)
    Beverages 11.9% 0.9% 6.2% 20.0% 100
    Foods (includes Oils and Fats, Culinary and Branded Staples ) 2.8% -52.7% - -28.7% (2,877)
    Ice Creams 0.9% -4.8% - -5.3% (569)
    Exports 12.4% 1.7% -35.6% 3.2% (184)
    Others (includes Chemicals, Agri, Plantations etc) 3.0% -22.0% - -10.9% (705)
    *Based on CY04 numbers



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