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HLL: Signs of quality earnings - Views on News from Equitymaster
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  • Jul 22, 2002

    HLL: Signs of quality earnings

    FMCG major, Hindustan Lever, has once again reported disappointing topline numbers. Sales in 2QFY03 have fallen by nearly 9%. But the company's operating margins continue to expand, indicating improvement in quality of earnings. The company has reported a 4% dip in net profits. But this is as a result of a huge extraordinary income (Rs 1.2 bn) reported in 2QFY02. Excluding extraordinary income effect in both years, the bottomline has actually improved by 16% YoY.

    (Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
    Net Sales 29,313 26,716 -8.9% 55,738 50,522 -9.4%
    Other Income 912 817 -10.4% 1,934 1,776 -8.2%
    Total expenditure 25,390 21,994 -13.4% 48,431 41,826 -13.6%
    Operating Profit (EBDIT) 3,923 4,722 20.4% 7,307 8,696 19.0%
    Operating Profit Margin (%) 13.4% 17.7% 13.1% 17.2%
    Interest 22 25 13.9% 33 60 85.0%
    Depreciation 328 316 -3.7% 660 700 6.1%
    Profit before Tax & extraordinary income 4,485 5,199 15.9% 8,548 9,712 13.6%
    Extraordinary income 1,199 469 -60.9% 1,425 1,216 -14.6%
    Tax 1,018 1,194 17.3% 1,912 2,169 13.5%
    Profit after Tax/(Loss) 4,666 4,473 -4.1% 8,061 8,759 8.7%
    Effective tax rate (%) 22.7% 23.0% 22.4% 22.3%
    Net profit margin (%) 15.9% 16.7% 14.5% 17.3%
    No. of Shares (eoy) (m) 2200.6 2201.2 2200.6 2201.2
    Earnings per share* 8.5 8.1 7.3 8.0
    Current P/e ratio (incl. Extraordinary income) 22.5 23.0

    Though HLL continued to face difficult market conditions, it continued its drive to restructure its businesses in order to improve the quality of its earnings. It continued to exit businesses not considered its core strengths. During the June quarter it sold off industrial and institutional business of Diversey Lever Group. The extraordinary income of Rs 469 m during 2QFY03 reflects the profit on this sell off. Last year's extraordinary income reflects profit on sale of the Quest fragrances business.

    Sales break-up
    (Rs m) 2QFY02 2QFY03 % change 1HFY02 1HFY03 % change
    a) Domestic FMCG 22,873 23,264 1.7% 44,302 43,532 -1.7%
    b) Exports 5,064 3,055 -39.7% 9,415 6,074 -35.5%
    c) Others 1,376 396 -71.2% 2,021 917 -54.6%
    Total 29,313 26,716 -8.9% 55,738 50,522 -9.4%

    The sharp decline in export sales during the quarter is a result of the conscious decision to exit non-value adding operations of the business. Though export sales declined by a huge 40%, it registered a higher profit of Rs 228 m during the quarter (up 44% from Rs 158 m in 2QFY02).

    Results on like to like basis
    (Rs m) 2QFY02 2QFY03 % change 1HFY02 1HFY03 % change
    Net sales 28,197 26,678 -5.4% 54,690 50,484 -7.7%
    PBIT 3,549 4,643 30.8% 6,739 8,456 25.5%
    PAT 3,277 4,002 22.1% 6,311 7,540 19.5%

    Similarly, though beverages turnover was down 6.8% during the quarter, the PBIT of the segment grew by over 13% YoY. On a like to like basis, HLL registered over 5% dip in topline and over 20% growth in net profits during 2QFY03. Despite the downturn, HLL's key segment, soaps & detergents saw turnover growth of 5.8% YoY. PBIT growth in this segment was much sharper at over 40% largely due to relaunched Lifebouy.

    The big picture...
      % contribution
    to 2QFY03 sales
    Turnover growth PBIT growth
    - Soaps and Detergents 44.4% 5.8% 42.2%
    - Personal Products 22.0% 1.7% 20.5%
    - Beverages 10.9% -6.8% 13.4%
    - Foods (includes Oils and Fats,
    Culinary and Branded Staples )
    6.4% 1.2% -
    - Ice Creams 1.6% -26.7% -
    - Exports 11.2% -39.7% 43.6%
    - Others (includes Chemicals, Agri, Plantations etc) 3.4% -57.4% -88.3%

    The personal products growth was a poor 0.7% YoY. But this was largely on account of the hair category which witnessed a decline, and the oral care segment that witnessed modest growth. The personal products category was saved by a 19% growth in the skin care segment.

    Cost break-up
    (Rs m) 2QFY02 2QFY02 Change 1HFY02 1HFY03 Change
    Material consumption 9,948 10,708 7.6% 19,385 19,640 1.3%
    Purchase of goods 7,253 3,683 -49.2% 14,044 7,505 -46.6%
    Staff costs 1,437 1,580 10.0% 2,922 3,038 4.0%
    Advertising & promotions 2,619 2,395 -8.6% 4,593 4,643 1.1%
    Other expenses 4,133 3,628 -12.2% 7,487 7,000 -6.5%
    Total 25,390 21,994 -13.4% 48,431 41,826 -13.6%

    On the whole, HLL continues its drive to rationalise businesses in order to improve the quality of its earnings. The company has been successful on two counts. One, it has successfully managed to either hive off or sold its non core businesses. As a result, FMCG brands now account for 87% of total 2QFY03 sales (up from 75% in January 2001). The other success is the improving profitability in the foods businesses. Gross margins in beverages have improved by 670 basis points, ice creams has seen margins improve by 1300 basis points and foods (staples etc.) by 65 basis points.

    At Rs 183 the stock trades at 23x 1HFY03 annualised earnings, market cap to sales ratio of 4x. Short term prospects continue to be marred by difficult market conditions, but HLL's strategy remains on course for the long term.



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