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Hindustan Lever Limited - Focussing on premium segment - Views on News from Equitymaster
 
 
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  • May 25, 2000

    Hindustan Lever Limited - Focussing on premium segment

    Hindustan Lever (HLL) has identified speed as the key to success in the business. The company has identified several growth strategies especially for its food business, which is growing at the higher rate than its personal products business.

    Excellent growth strategies:

    • HLL will continue to focus on volume and steady bottomline growth. The strategy would be to be present in every segment of the fast moving consumer goods and popular foods market.
    • The company will continue to focus on top-end premium products. To fight against downgrading of products, HLL will have products in even lower or cheaper segments, while simultaneously being aggressive in the top end segment of the personal products market.
    • The company is planning to double its food business turnover over the next three years (currently close to Rs 20 bn).
    • Internet would be a key delivery vehicle for speeding up HLLís distribution and sales efforts. The company will be able to unlock large hidden values in the long run by entering into the areas of B2B and B2C, which would be reflected directly in its bottomline.

    In the past few years, HLLís revenue growth in soaps & detergents and personal products category is slowed down due to increasing competition and saturating market growth. However its food products business which contributes around 30% to its total revenue is growing faster than the other categories. As the consumer spend more on food than other products such as detergents and personal care, the food business is bound to grow significantly. The business grew by 54% in volume terms and 67% in value terms in FY99 on a year over year basis. The company's growing popular food and beverages business will be a critical area for overall future growth.

    Turnover break-up
    Particulars (Rs m) 1999 1998 % change
    Soaps, Detergents & Scourers 41,010 36,960 11.0%
    Personal Products 17,650 15,260 15.7%
    Beverages 15,750 17,990 -12.5%
    Oils & Vanaspati 6,130 6,530 -6.1%
    Dairy Products 520 780 -33.3%
    Ice Cream & Frozen Desserts 1,710 1,550 10.3%
    Processed Fruits 1,230 1,190 3.4%
    Branded Staple Foods 2,180 1,600 36.3%
    Speciality Chemicals 2,330 2,270 2.6%
    Others 12,910 10,690 20.8%
    Total 101,420 94,820 7.0%

    Food business in a transformation phase:

    • For increasing the growth in its tea business, HLL will focus on building new distribution channels like vending machines for tea. By offering tea or ice cream on the roadside the company will be able to create a new market for its tea and ice cream business.
    • HLL has identified Kisan Annapurna as its flagship brand, which has a turnover of Rs 3 bn covering various food products. The brand is expected to provide support to a slew of ready to eat products to be launched soon. It has plans to increase the turnover of the brand to Rs 10 bn in the next three years. The acquisition of Modern Foods with 14 units and 22 franchises will lead HLLís staple foods thrust. Food products business being high margin business will help the company in improving its profit margins positively affecting its bottomline.
    • In India the food business including beverages contributes only around 27 per cent to the company's turnover, while it accounts for around 40 per cent of Unilever's global sales. This offers a good opportunity to grow organically in the food business.

    Valuations:
    At the current market price of Rs 2,240, HLL is trading at a PER of 45.9 times with a market cap to sales ratio of 4.8 times. Transformation from soaps & detergents company to food products is likely to spell good times for the company in time to come. The valuations are likely to be re-rated with excellent year over year financial performance and increasing returns.

     

     

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