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HLL: Revenues recover marginally

Apr 16, 2003

Hindustan Lever Ltd. (HLL) has posted a marginal 1.2% growth in topline during the March quarter. However, the company's bottomline is down 11% YoY. However, if we exclude the extraordinary income which HLL earned during previous year's March quarter, then the bottomline is up 8% YoY.

(Rs m)1QFY031QFY04ChangeFY03
Net Sales23,38523,6751.2%99,549
Other Income9591,41347.3%3,845
Total expenditure19,41119,7691.8%79,990
Operating Profit (EBDIT)3,9743,906-1.7%19,559
Operating Profit Margin (%)17.0%16.5%19.6%
Interest3618-48.7%92
Depreciation384308-19.9%1,341
Profit before tax4,5134,99310.6%21,971
Extraordinary income7470-384
Tax9751,16319.3%4,799
Profit after Tax/(Loss)4,2853,829-10.6%17,557
Net profit margin (%)18.3%16.2%17.6%
No. of Shares (eoy) (m)2201.22201.22201.2
Diluted earnings per share*7.87.08.0
P/E ratio20.718.1
*(annualised)

As per the company release, on a like to like basis HLL has reported a 2.9% topline growth, which is an encouraging sign. In 4QFY03 (i.e. December quarter 2002), the company had reported a marginal 0.1% dip in revenues. On a like to like basis, the company's net profit is up 7% YoY.

Results on like to like basis
(Rs m)1QFY031QFY04% change
Net sales 23,006 23,675 2.9%
PBIT 3,865 4,160 7.6%
PAT 3,578 3,829 7.0%

The domestic FMCG business of the company grew by 1.4% during the quarter. Within this, the domestic HPC segment recorded a healthy 5.6% growth in revenues (led by 8% growth in the company's power brands). However, the foods business revenues continued to show signs of worry (down 10%). Within this, the processed popular foods business grew by 18%.

Sales break-up
(Rs m)1QFY031QFY04% change
Domestic HPC14,39415,2015.6%
Domestic Foods 5,451 4,915 -9.8%
Domestic FMCG 19,845 20,116 1.4%
Exports 3,019 3,156 4.6%
Others 520 403 -22.5%
Total 23,385 23,675 1.2%

The key growth driver for HLL this quarter was the personal products segment (grew by 16.7%). This segment earned a PBIT margin of over 32% this quarter. Beverages (tea) continued its disappointing run (revenues down over 15%). However, looking more closely tea profitability has gone up (PBIT margins stood at 21%).

Segment revenue snapshot
(Rs m)1QFY031QFY04Change
Soaps and Detergents 9,921 10,026 1.1%
Personal Products 4,549 5,307 16.7%
Beverages 3,465 2,950 -14.9%
Foods (includes Oils and Fats,
Culinary and Branded Staples )
1,616 1,674 3.6%
Ice Creams 263 199 -24.5%
Exports 3,019 3,156 4.6%
Others (includes Chemicals, Agri,
Plantations etc)
841 703 -16.4%
Total Segment Revenue 23,674 24,015 1.4%
Less : Inter segment revenue 163 126 -22.7%
Net Segment Revenue 23,511 23,889 1.6%

Ice-creams too, showed a YoY dip of 25%, but this is largely a planned move by the company as it chases profitability over volumes (PBIT margins stood at 37%). Soaps and detergents, which contributes 42% to revenues reported a marginal 1% growth. In this segment margins dipped a little refelcting the difficult market conditions.

The big picture...
 %
contribution to sales
Revenue
growth
PBIT
growth
PBIT margin
(%)
PBIT margin
growth
(basis points)
Soaps and Detergents41.9%1.1%-3.8%21.8%-109
Personal Products19.2%16.7%12.8%32.4%-110
Beverages14.6%-14.9%3.3%21.0%370
Foods (includes Oils and Fats,
Culinary and Branded Staples )
6.8%3.6%-10.5%-3.1%49
Ice Creams1.1%-24.5%-193.7%36.8%6638
Exports12.8%4.6%-12.1%6.4%-122
Others (includes Chemicals, Agri,
Plantations etc)
3.6%-16.4%-139.4%4.7%1471

HLL's sales slowdown seems to be correcting (see graph). The company's restructuring measures, which saw it focus on 30 power brands, hiving or selling of non-core businesses is finally showing some results. The company's profitability is up, owing to improvement in margins over the last few years. Though in the current quarter operating margins have dipped marginally, it is not a big cause for concern. Infact, at the analyst meet post its annual results, the management had indicated that they are pretty happy with the current operating profitability and would look for revenue growth in FY04.

At the current price of Rs 144, the stock trades at 18x our estimated FY04 earnings, market cap. to sales of 3.1x. The stock continues to be on the premium end of the valuation spectrum if you look at it from the short term perspective. However, over the long term, we continue to be positive on HLL's prospects owing to its management credibility, its branding skills and logistical reach.

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