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HLL: Momentum continues! - Views on News from Equitymaster

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HLL: Momentum continues!
Feb 20, 2007

Performance summary
FMCG behemoth, Hindustan Lever Ltd (HLL), has announced decent results for the fourth quarter and full year results ended December 2006. For CY06, the company has reported a topline growth of 9.4% YoY. Also, operating margins have expanded by 60 basis points due to stock related adjustments. Due to this, as also on the back of lower interest charges, the bottomline growth of 13.7% YoY (excluding extraordinary items) has outperformed the growth in topline. However, the results for the quarter are not comparable to those of 4QCY06 to the extent of amalgamation of Vashisti Detergents Limited with the company and the demerger and subsequent disposal of Doom Dooma and TEI plantation divisions.

(Rs m) 4QCY05 4QCY06 Change CY05 CY06 Change
Net sales 29,743 31,561 6.1% 110,606 121,034 9.4%
Expenditure 24,925 26,561 6.6% 96,172 104,553 8.7%
Operating profit (EBDITA) 4,818 5,000 3.8% 14,433 16,481 14.2%
Operating profit margin (%) 16.2% 15.8%   13.0% 13.6%  
Other income 642 1,070 66.6% 3,048 3,545 16.3%
Interest 36 18 -48.9% 192 107 -44.0%
Depreciation 316 342 8.2% 1,245 1,302 4.6%
Profit before tax 5,108 5,709 11.8% 16,045 18,617 16.0%
Tax 723 875 21.0% 2,500 3,220 28.8%
Extraordinary items 824 278 -66.3% 536 3,157 489.1%
Profit after tax 5,209 5,112 -1.9% 14,081 18,554 31.8%
Net profit margin (%) 17.5% 16.2%   12.7% 15.3%  
Effective tax rate (%) 14.2% 15.3%   15.6% 17.3%  
No. of Shares (m) 2201.2 2201.2   2201.2 2201.2  
Diluted earnings per share*       6.4 8.4  
P/E ratio (x)         23.7  
(* Trailing 12 months)            

What is the company’s business?
HLL is India’s largest FMCG company with a dominant presence in almost all consumer categories. The company’s turnover, at Rs 110 bn in CY05, was over one third of the total branded/organized FMCG market in India. HLL's brand equity remains unrivalled in India. In the last couple of years, the company 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. Barring the unexpected competition witnessed in its soaps and detergents category in 2004, the initiatives taken by the company have yielded positive results.

What has driven performance in 4QCY06?
Momentum continues: HLL registered an overall growth of 6.1% YoY in the topline for 4QCY06. The sales of the continuing businesses i.e. after eliminating impact of disposals was higher by 6.9% YoY. The HPC and the foods division aided the growth during the quarter with the FMCG business growing by 8.5% YoY, which includes 4.3% volume growth, while remaining were the price hikes done in the selective products.

Segment revenue snapshot
(Rs m) 4QCY05 4QCY06 % change CY05 CY06 % change
Soaps and Detergents 12,969 14,281 10.1% 49,617 55,959 12.8%
Personal Products 8,713 8,934 2.5% 29,519 33,598 13.8%
Beverages 3,388 3,670 8.3% 12,775 13,307 4.2%
Foods (includes Oils and Fats) 865 1,022 18.1% 3,137 3,849 22.7%
Ice Creams 172 263 53.3% 982 1,371 39.7%
Exports 3,573 3,473 -2.8% 13,478 12,789 -5.1%
Others (includes Chemicals, Agri, Plantations etc) 553 603 9.1% 2,505 1,802 -28.0%
Total Segment Revenue 30,232 32,246 6.7% 112,012 122,675 9.5%
Less : Inter segment revenue 9 37   73 95 30.7%
Net Segment Revenue 30,224 32,209 6.6% 111,939 122,580 9.5%

For 4QCY06, HPC business grew at 6.8% YoY, led by double-digit growth in laundry and toothpaste. Strong volume growth across the portfolio was witnessed due to the rising income and changing lifestyle of the consumers. In the toothpaste segment, Close Up continued to witness good growth. Lifebuoy, Pears and Lux aided the growth in the personal wash segment. Due to milder and late winters skincare segment was affected. New investments in the top end products are been done by the company to provide products across various price points. In the shampoo segment, the new launch of Clinic All Clear offsetted the gains of Sunsilk and Clinic Plus. The company has managed to retain its market share across most of its divisions even in a competitive environment, which is commendable.

As far as the foods division (10.9% YoY growth) is concerned, coffee continued to perform well, led by instant coffee. Tea witnessed a decent growth with the relaunch of Taaza during the quarter. Strong performances by Kissan portfolio and Knorr range have driven processed foods growth. The ice cream business continued its double-digit growth led by the impulse category and wider availability. On the exports front, the company witnessed a negative growth, as its marine products did not do well. The company is planning to divest it. HLL’s CY06 topline was marginally lower than our expectations. However, given the company’s strategy of innovations and renovations across products and better presence in the organised retail space, the management is bullish on the topline performance of the company.

Cost break-up
as a % of sales 4QCY04 4QCY05 CY05 CY06
Cost of goods sold 54.0% 54.2% 55.7% 53.7%
Staff costs 3.7% 4.2% 5.3% 5.3%
Advertising & promotions 8.9% 9.0% 9.1% 10.5%
Other expenses 17.2% 16.7% 16.8% 16.8%
Total Expenditure 83.8% 84.2% 87.0% 86.4%

Steady margins: During the quarter, the company’s margins remained constant as the cost saving initiatives done by the company mitigated the impact of escalating costs. These savings, together with selective price increases stabilised the margins. A significant part was also re-deployed in supporting brands for driving sales growth and hence the advertising and promotion expenditure increased by 7% YoY and 27% YoY respectively for 4QCY06 and the full year. The company has made around Rs 2.5 bn investments in the last two years on brand building and expects it to continue.

Segment Results (Profit before interest and tax)
Segment Results (Profit before interest and tax) 4QCY05 4QCY06 % change CY05 CY06 % change
Soaps and Detergents 2,035 2,227 9.5% 6,837 7,731 13.1%
Personal Products 2,751 2,846 3.4% 8,452 9,431 11.6%
Beverages 678 722 6.5% 2,424 2,205 -9.0%
Foods (includes Oils and Fats, Culinary and Branded Staples ) -34 64 -292.2% -161 129  
Ice Creams -12 28 -336.1% 51 187 268.5%
Exports 213 205 -3.9% 491 664 35.3%
Others (includes Chemicals, Agri, Plantations etc) -51 -249 384.4% -277 -674 143.4%
Total Segment Results 5,580 5,843 4.7% 17,817 19,673 10.4%

Bottomline outperforms the topline: Barring the extraordinary item, the bottomline has actually grown by 10.2% YoY. Exceptional items for the quarter comprises of profit arising from disposal of 51% share in a subsidiary, reduction in liability for retirement benefits arising from impact of revised interest rates and lower annuity costs and restructuring costs in the foods business. Lower interest costs and higher other income also aided bottomline growth. Excluding the extraordinary items, the net profits are in line with our expectations.

All round picture:
(CY06 figures) contribution
to sales
Revenue
growth
PBIT
growth
PBIT
margin (%)
PBIT margin
growth (basis points)
Soaps and Detergents 45.6% 12.8% 13.1% 13.8% 4
Personal Products 27.4% 13.8% 11.6% 28.1% (56)
Beverages 10.8% 4.2% -9.0% 16.6% (240)
Foods (includes Oils and Fats,
Culinary and Branded Staples )
3.1% 22.7% 0.0% 3.3% 847
Ice Creams 1.1% 39.7% 268.5% 13.7% 848
Exports 10.4% -5.1% 35.3% 5.2% 155
Others (includes Chemicals,
Agri, Plantations etc)
1.5% -28.0% 143.4% -37.4% (2,633)

What to expect?
At Rs 200, the stock is trading at 23.7 times its 12-months trailing earnings. The company has done well to maintain its market share across the products. Also, with the economy in good health and disposable incomes on rise, the urban consumers continued with their buying spree. Even the rural demand kicked in this year, which helped the company register strong volume performance. The organised retailing sector is expected to provide a massive opportunity for the company to grow. Also, the company has made plans to focus on the foods segment and newer areas like water business, skin care segment among others. Though the company was marginally successful in passing on the hike to the consumers, seeing the competition in the market, HLL may not be able to do that in the future. Also, with rising inflation, FMCG companies have to compete for the share of the consumer’s wallet. This may be a cause of worry. The company will have to continue with the innovations and renovations of its products to continue exciting the consumers. The company has recommended a dividend of Rs 3 per share (dividend yield of 1.5%)

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