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Operating efficiencies drive HLL's net

Feb 15, 2001

HLL has beaten expectations by reporting a 23% growth in profits with a marginal growth in revenues for the year ended December '00. The topline growth has slowed down during the year due to reduced volumes in low price portfolio. This was a result of intense competition and general market slowdown.

(Rs m)FY00FY01Change4QFY004QFY01Change
Sales 101,420 106,038 4.6% 24,967 26,478 6.1%
Other Income 3,190 3,451 8.2% 1,145 855 -25.4%
Expenditure 89,224 91,397 2.4% 21,482 21,757 1.3%
Operating Profit (EBDIT) 12,196 14,641 20.0% 3,485 4,721 35.5%
Operating Profit Margin (%)12.0%13.8% 14.0%17.8% 
Interest 224 132 -41.3% 50 45 -10.4%
Depreciation 1,288 1,309 1.7% 272 345 26.8%
Profit before Tax13,87516,65120.0%4,3085,18720.4%
Tax 3,180 3,550 11.6% 862 900 4.4%
Profit after Tax/(Loss) 10,695 13,101 22.5% 3,446 4,287 24.4%
Net profit margin (%)10.5%12.4% 13.8%16.2% 
No. of Shares (eoy) (m) 2,200.6 2,200.6   2,200.6 2,200.6  
Diluted Earnings per share*4.96.0 6.37.8 
P/E (at current price) 42 35     

During the December quarter, HLL recorded a healthy 6% growth in sales, which was higher than its past two quarters (4.6% in 2QFY01 and 0.4% in 3QFY01). The topline growth of the company was partly fueled by the integration of tea exports business of Lipton India Exports Ltd (a 100% subsidiary of the company). During the quarter a declining trend in tea sales was reversed, leading to improvement in sales. Further, strong performance of branded staples and culinary products aided the growth rates.

Operating margins of the company improved sharply by 180 basis points because of improved business mix and overall supply chain efficiencies. In the fourth quarter, operating profits margins were up by more than 380 basis points to 17.8%. HLL incurred business restructuring expenditure costs of over Rs 1 bn during the year in order to improve the bottomline growth.

At the current market price of Rs 206, HLL is trading at 35 times its FY01 earnings. Concerns about its slowing topline growth has adversely affected the company's stock price in the past few months. The company's market cap to sales ratio of 4.3 times is still below its historic 5-6 times. The future premium valuations of the company depends on its ability to maintain its performance which again is related to economic growth rate.

We had projected a 17% rise in profits of HLL for the year ended December '00. But the company's improved operating efficiencies in the fourth quarter is a welcome surprise. Based on this we will have to revise our future projections.

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