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HLL: Habitual outperformer

Mar 7, 2001

The Sensex has come down to a level from where it began the new millennium. Since the beginning of the year 2001, the BSE Sensex gained marginal 0.9%. Not surprisingly, HLL, the FMCG major accumulated a gain of more than 12% during the same period. The FMCG giant, HLL is always perceived to be a defensive stock in the investors mind. The company is known for its consistent performance year over year with a long-term vision. It has successfully changed its image of soaps and detergent company to a food product company. The segment now contributes around 9% of its turnover (5% in 1996).

During the year the concern over HLLís stagnant topline growth was overcome by outstanding growth rates in its food product portfolio. In the food segment branded staples witnessed a strong growth of 26% for the year ended December í00. The soaps and fabric care segment grew by 16% and 10% respectively. The turnover breakup given here reflects the difference.

Turnover breakup
(Rs m) FY00 FY01 Change
Soaps & Detergents 39,650 40,840 3.0%
Personal Products 17,700 18,680 5.5%
Beverages 14,780 15,460 4.6%
Foods 7,180 7,780 8.4%
Ice Cream 1,710 1,640 -4.1%
Exports 13,540 17,790 31.4%
Chemicals & Others 6,860 3,850 -43.9%
Total 101,420 106,040 4.6%

HLLís slackening ice-cream business too witnessed a smart recovery in the second half of the year 2000 with a volume growth of 10%. Launching of low price softy kiosks in major metros has helped in reviving the business.

The companyís intention to focus on 30 key brands, which currently contribute more than 100% to its profits, is likely to drive its future growth. Such a move will enable the company to focus its marketing strength on few brands. It is also exiting from non-core areas. It has recently diluted 74% stake in Goldmohur Foods & Feeds Services in favour of joint venture with Godrej Agrovet. Further, integration of tea export business of Lipton India Exports Ltd. is expected to add significantly to its bottomline, as it is a high margin business. These are the few examples of the managementís long-term vision with strong growth strategies, which has again reinforced the confidence in the stock.

The company has also benefited maximum from the changes announced in the current budget. All food preparations based on fruits and vegetables have been given complete exemption from excise duty (including products of common use like sauces, jams, ketchup and pickles). The increase in tea development allowance, reduction in excise duty on toiletries and cosmetics, removal of 10% surcharge on corporate tax and reduction in dividend tax to 10% (from 20%) are expected to give a fillip to HLLís net profits growth in FY02 (expected growth 22%). Further, the custom levy on imports of edible oil and tea has been increased to protect the domestic industry. In short the budget has provided windfall gains to HLL.

At the current market price of Rs 227 HLL is trading at a P/E multiple of 31 times its FY02 projected earnings, with a market cap to sales ratio of 4.4 times. Historically, the company has traded in the P/E range of 45-50 times. HLLís current valuations are among the highest in the industry. This could indicate that the markets are anticipating a revival in the performance of the company. We have projected an earnings growth of 22% on the sales revenues in the range of Rs 113 bn (growth of 6%) for FY02. The companyís high valuations reflect the well-diversified business model, its size and more importantly the confidence of investors in the stock.


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