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HLL: What will drive growth?

Feb 12, 2001

India’s largest consumer company, HLL is witnessing a slow down in its growth rates since the past few quarters due to sluggish market conditions and increasingly competitive environment. These factors have resulted in a single digit growth in the topline of the company.In the time frame of first nine months of the year 2000, the company registered a marginal 4% increase in revenues with almost zero volume growth. The robust historical sales growth at an average rate of around 12% has decelerated due to several competitive factors. Its competitor Colgate has become aggressive in oral care markets by introducing several new products and re-launching existing products. Colgate has been able to re-gain its lost market share with innovative marketing strategies. This has resulted in a double-digit growth (10%) in sales of the company for the half year ended December ’00. Similarly, Nirma has also succeeded in taking away market share from HLL in its core soap business. Thus, focused competition in different segment is making it difficult for HLL to increase its market share and drive growth.

Financial snapshot
December ended (Rs m) FY00 FY01E Change
Net sales101,424105,8754.4%
Other income3,1903,91322.7%
Total revenues104,614109,7884.9%
Operating profit12,20113,65811.9%
Depreciation1,2881,267-1.6%
Interest224120-46.4%
Profit before tax13,87916,18416.6%
Tax3,1803,64114.5%
Profit after tax10,69912,54217.2%
Number of shares2,200.62,200.6 

Ratio analysis
Particulars FY00 FY01E
Operating profit margin12.0%12.9%
Effective tax rate22.9%22.5%
Net profit margin10.5%11.8%
EPS (Rs)4.95.7
Net working cap to sales 1.8%1.8%
RONW 50.9%51.5%
ROA 21.0%25.7%
ROIC 47.9%50.4%

HLL is expected to post around 4% growth in revenues and 17% increase in profits. The company’s efficient working capital management has enabled it to maintain good growth in profits. HLL’s future growth rates could be aided by acquisition of companies in particularly the food segment, which is relatively in a nascent stage. Given the company’s size, smaller acquisitions like International Best Foods will not drive earnings growth. Britannia, Parle, Marico, Nirma and SmithKline Beecham Consumers’ Horlicks brand could be likely takeover target for the company. Also, the company stated its interest in acquiring a tea brand in western India and a hair oil brand in south some times back. HLL has a history of brand and corporate acquisitions aided by its strong competitive position and financial muscle.

The stock gets a P/E multiple of 38 times December ’00 projected earnings and market cap to sales ratio of 4.5 times. HLL’s current valuations are among the highest in the industry. This could indicate that the markets are anticipating a near term growth revival. The company’s rich valuations reflect the well-diversified business model, its size and more importantly the confidence of investors in the stock.

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