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HLL: Our view

Mar 11, 2004

There has been a lot of speculation on what will happen to HLL's performance post the strong cut in detergent prices by rival, P&G. Many have actually written the company off, which is reflected in the market mood towards the stock over the last few days. While we do believe that the price cuts in the detergent business will make an impact, there are a few facts that you as an investor need to understand before taking your decision. First of all, let's understand how much of HLL's revenues come from detergents. The table below tells us that soaps and detergents business was around 43% of 2003 revenues, with PBIT margins of 24.8%.

The big picture…
% contribution
to sales
Revenue growth PBIT growth PBIT margin
(%)
PBIT margin
growth (basis points)
Soaps and Detergents 42.6% -0.1% -4.1% 24.8% (102)
Personal Products 23.4% 15.0% 16.3% 36.7% 40
Beverages 11.5% -3.9% -7.7% 19.0% (78)
Foods (includes Oils and Fats,
Culinary and Branded Staples )
5.9% -15.7% - 0.1% 414
Ice Creams 0.9% -12.9% - 0.4% 1,383
Exports 12.1% -0.8% -35.8% 4.9% (270)
Others (includes Chemicals,
Agri, Plantations etc)
3.6% 6.7% - -4.1% (371)
*Based on FY04 numbers

Out of this 43%, detergents business is almost half, the other half being soaps. So effectively, what it really means is that only around 21% of HLL's revenues (detergents) is facing the competitive pressure by P&G. But with HLL itself countering it by its own wave of price cuts, it is unlikely to lose market share, but may see a dip in PBIT margins.

On the other hand, due to the price cuts, three possible scenarios could happen. One, existing users of lower end detergents may upgrade to these detergents. Two, the price cuts may help kick start the elusive demand and three, regional and smaller players which were competing on price may have to shut shop eventually and we may see a consolidation in this sector. All the three scenarios are positive for market leader HLL over the long term.

In our view, what could happen is that HLL is likely to see a steady improvement in topline growth in 2004. However, earnings may remain flattish (EPS Rs 8.4 - 2004 estimates). But that is also largely because HLL is paying out 9% interest to its debenture holders.

Another thought doing the rounds is that, what if these price cuts water down to other segments like soaps and personal products. In our view, it is likely to happen in personal products if not today but definitely over the long term. What we need to stress here is that price competition in FMCG sector is not a new phenomenon. It has happened in the past in India and globally as well. It happened in oral care recently, when Colgate undertook a price cut of nearly 17% across all its toothpaste brands. Though this cut did affect its topline growth (value terms) between April to September 2003, volumes started to grow. In the third quarter (October to December), value growth too was back on track. HLL also grew by 12% in the oral care business in 2003.

The point we are trying to make here is that price cuts need not be always bad news. In a growing economy like India they may serve to kick start volume growth and more or less make up for the price cuts. In the FMCG scenario, HLL is the undisputed market leader in most categories it operates in. Its logistical (distribution) support is unmatched by rivals. The kind of economies of scale that HLL can deliver even in a difficult price environment is not likely to be possible for rivals like P&G.

In our view, if you are reading reports of 'Sell' on HLL and want to act on it, do not act in haste. Wait. Similarly, if after reading our somewhat positive article on HLL you are itching to buy the stock, don't buy just yet. Wait. Let the dust settle. If however, you want to look at HLL from a long-term perspective, keep taking advantage of the selling waves that come in.

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