HLL: Topline hiccups, strategy on course - Views on News from Equitymaster

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HLL: Topline hiccups, strategy on course

Apr 15, 2002

FMCG major, Hindustan Lever (HLL), has declared an unprecedented 10% decline in 1QFY03 topline. The decline has come in the wake of a continuing slide in several key markets like personal wash, oral care and tea. The management also indicated that a move to improve gross margins of the foods business through improved realisations and efficiencies, also impacted volumes.

(Rs m) 1QFY02 1QFY03 Change FY02
Net Sales 26,425 23,807 -9.9% 109,719
Other Income 1,022 959 -6.1% 3,818
Total expenditure 23,041 19,833 -13.9% 92,579
Operating Profit (EBDIT) 3,384 3,974 17.4% 17,140
Operating Profit Margin (%) 12.8% 16.7%   15.6%
Interest 11 36 224.5% 77
Depreciation 332 384 15.8% 1,447
Profit before tax 4,063 4,513 11.1% 19,434
Extraordinary income 226 747 230.8% 1,004
Tax 894 975 9.1% 4,024
Profit after Tax/(Loss) 3,395 4,285 26.2% 16,413
Net profit margin (%) 12.8% 18.0%   15.0%
No. of Shares (eoy) (m) 2200.6 2201.2   2201.2
Diluted earnings per share* 6.2 7.8   7.5
P/E ratio   28.7    

However, despite the depressing topline, the highlight of HLL's performance has been improving realisations. The company's operating margins increased by 390 basis points to 16.7% through improved product portfolio, focus on operating efficiencies and cost controls and restructuring benefits. This improvement came despite a 13.9% increase in advertising and promotion spends.

Sales break-up
(Rs m) 1QFY02 1QFY03 % change
a) Domestic FMCG 21,429 20,267 -5.4%
b) Exports 4,351 3,019 -30.6%
c) Others 645 520 -19.3%
Total 26,425 23,807 -9.9%

The higher operating margins coupled with a Rs 747 m extraordinary income in the form of profit on sale of the seeds business to India Seed Holdings Limited, helped HLL finish the first quarter of FY03 with a healthy 26% growth in bottomline.

Cost break-up
(Rs m) 1QFY02 1QFY03 % change
a)(Increase)/decrease in stock in trade 11 (306) -2961.6%
b) Consumption of raw/packing materials 9,426 9,237 -2.0%
c) Purchase of goods 6,790 3,822 -43.7%
d) Cost of Goods Sold (a+b+c) 16,227 12,754 -21.4%
e) Staff Cost 1,486 1,458 -1.9%
f) Advertising & Promotions 1,974 2,249 13.9%
g) Other expenditure 3,354 3,372 0.5%
Total expenditure (d+e+f+g) 23,041 19,833 -13.9%

A look at the table below reveals that all of HLL's product categories saw a decline in sales. However, except for foods, all other categories turned in a higher profit. This indicates that HLL's continued focus on quality earnings is yielding results. Once HLL's portfolio churning gets over and the economy recovers, it will be well geared to take advantage of its restructuring initiatives.

The big picture
(Rs m) % contribution to
1QFY03 sales
Turnover
performance
PBIT
growth (%)
- Soaps and Detergents 41.5% -4.1% 11.5%
- Personal Products 20.1% -3.3% 11.6%
- Beverages 14.4% -11.5% 13.9%
- Foods (includes Oils and Fats, Culinary and Branded Staples ) 6.7% -6.9% -286.5%
- Ice Creams 1.2% -24.9% 24.0%
- Exports 12.5% -30.6% 20.6%
- Others (includes Chemicals, Agri, Plantations etc) 3.5% -31.7% -485.8%
Total Segment performance   -11.0% 7.2%

Though we continue to favour HLL's prospects going forward, based on the management's credibility and focus, the fall in topline growth underlines the difficult market environment. At Rs 223 the stock trades at 29x annualised 1QFY03 earnings, market cap to sales of 5.2x.


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