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HLL: Really, fast moving! - Views on News from Equitymaster
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HLL: Really, fast moving!
Jul 31, 2006

Performance summary
Hindustan Lever Ltd (HLL), India’s largest fast moving consumer goods company, has announced strong results for the second quarter ending June 2006. While revenues have grown by almost 9% YoY, the bottomline has witnessed a robust 35% YoY growth during 2QCY06. However, the results for this quarter are not strictly comparable to extent of integration of certain subsidiaries, demerger and subsequent disposal of a couple of plantations, and the amalgamation of a detergent company. The board has recommended an interim dividend of Rs 3 per share (dividend yield of 1.2%).

(Rs m) 2QCY05 2QCY06 % change 1HCY05 1HCY06 % change
Net sales 28,362 30,832 8.7% 53,427 58,813 10.1%
Expenditure 24,906 26,685 7.1% 47,535 51,360 8.0%
Operating profit (EBDITA) 3,456 4,147 20.0% 5,892 7,452 26.5%
EBDITA margin (%) 12.2% 13.4%   11.0% 12.7%  
Other income 794 814 2.6% 1,540 1,508 -2.1%
Interest 56 34 -38.2% 101 55 -45.2%
Depreciation 318 301 -5.6% 628 640 1.8%
Profit before tax 3,876 4,626 19.4% 6,702 8,266 23.3%
Extraordinaty item (188) 13   (273) 1,502  
Tax 872 833 -4.5% 1,110 1,533 38.0%
Profit after tax/(loss) 2,816 3,807 35.2% 5,319 8,235 54.8%
Net profit margin (%) 9.9% 12.3%   10.0% 14.0%  
No. of shares (m) 2201.0 2201.0   2201.0 2201.0  
Diluted earnings per share (Rs)*       7.6  
Price to earnings ratio (x)*         31.4  
* On a 12-month trailing basis

What is the company’s business?
HLL is India’s largest FMCG company with a dominant presence in almost all consumer categories. The company’s turnover, at Rs 110 bn in CY05, was over one third of the total branded/organized FMCG market in India. HLL's brand equity remains unrivalled in India. In the last couple of years, the company has embarked on a major restructuring exercise focusing on improvement in quality of earnings, pruning brand portfolio and securing a viable future for its non-core businesses through JVs, or spin-offs. Barring the unexpected competition witnessed in its soaps and detergents category in 2004, the initiatives taken by the company have yielded positive results.

What has driven performance in 2QCY06?
Volume led sales: According to AC Neilsen, a leading market research agency, the total market for consumer goods grew by 10% QoQ during 2QCY06 (with rural markets witnessing 14% QoQ growth and urban markets reporting 8% QoQ growth). As such, while HLL’s topline growth of around 9% YoY looks like an underperformance, if one were to adjust performance of its discontinuing businesses (Nihar and tea plantations), the continuing business has grown in line with the market (by 10% QoQ).

The company’s FMCG business grew by 12% YoY during the quarter, being led by an 8% YoY growth in volumes. Further, growth in all categories like laundry, shampoo, skin, personal wash and toothpaste, resulted in the health & personal care (HPC) segment grow its revenues by near 14% YoY. The laundry category performed well both in premium and popular segments. On the personal care front, shampoos witnessed a value cum volume growth. While ‘Clinic All Clear’ gained 270 basis points in market share, ‘Sunsilk’ too performed well.

‘Lux’ and ‘Lifebuoy’, the company’s major soap offerings also continued to do well. The re-launch of Lifebuoy led the growth in the soap category. Also, all brands in the skin and oral care category (particularly Close Up) maintained the growth momentum.

The foods division grew by a marginal 4% YoY during 2QCY06. Ice creams driven by impulse category was the key performer in this segment with a 34% YoY growth. Processed foods (complete Kissan portfolio was relaunched) also aided the growth. However, the beverage category underperformed the overall growth. Though the instant coffee segment did well, performance of the tea category was a disappointment. This was mainly due to a sluggish growth of the tea market due to higher tea prices. The value growth for the quarter remained flat, while volumes fell by 6% YoY.

On the export side, the FMCG (HPC and beverages) did well, though the management has not revealed the extent of this growth. However, the specialty segment (non-FMCG) witnessed a decline. Consequently, the total exports grew by a meagre 2% YoY during the quarter.

Segment revenue snapshot
(Rs m) 2QCY05 2QCY06 % change
Soaps and Detergents 12,876 14,559 13.1%
Personal Products 7,474 8,467 13.3%
Beverages 3,122 3,006 -3.7%
Foods (includes Oils and Fats,
Culinary and Branded Staples )
783 973 24.2%
Ice Creams 376 506 34.4%
Exports 3225 3287 1.9%
Others (includes Chemicals, Agri,
Plantations etc)
786 379 -51.8%
Total Segment Revenue 28,643 31,176 8.8%
Less : Inter segment revenue 28.1 19.2 -31.7%
Net Segment Revenue 28,615 31,157 8.9%

Cost control aids margins: Cost saving initiatives as well as buying efficiencies mitigated the impact of rising input prices. The company, however, increased its ad spends by nearly 21% YoY as it views this expense as investments for its future sales growth. Going forward, though cost inflation on the back of rising crude price remain a concern, the company will continue to focus on cost efficiencies and will appropriately invest in building brands.

Cost break-up
As a % of net sales 2QCY05 2QCY06 1HCY05 1HCY06
Total Cost of goods 55.6% 53.3% 56.6% 53.9%
Staff Cost 6.1% 5.7% 6.3% 5.6%
Advertisement 10.1% 11.2% 9.3% 11.0%
Other Expenditure 15.9% 16.3% 16.7% 16.8%

Margin expansion, lower interest aids bottomline: Apart from the expansion in operating margins during the quarter, lower interest and depreciation expenses also aided HLL’s bottomline during 2QCY06. If one were to adjust the bottomline for extraordinary items, the growth has been 26% YoY.

The big picture…
   Contribution to
sales (%)
PBIT Margin
Soaps & Detergents 46.7% 13.1% 21.8% 14.3%
Personal Products 27.2% 13.3% 16.4% 28.5%
Beverages 9.6% -3.7% -24.5% 13.5%
Foods (includes Oils & Fats, 3.1% 24.2% 0.0% 4.3%
Ice Creams 1.6% 34.4% 115.0% 21.5%
Exports 10.5% 1.9% 593.3% 4.7%
Others (includes Chemicals, 1.2% -51.8% 45.3% -50.7%

What to expect?
At Rs 238, the stock is trading at 31.4 times its 12-months trailing earnings. The fact that HLL again seems to be on a growth track after the past two years of restructuring is enthusing. The company is also actively addressing the rising input cost pressures and the effect was seen in this quarter as well. We believe that HLL’s strong portfolio of brands across price points and across a large spectrum of categories will help the company against competition in the time to come. Also with rural sales gaining momentum, HLL seems to be in for better times ahead.

Subsidiaries integrated (International Fisheries, Lipton India Exports, Merryweather Food Products, TOC Disinfectants, and Lever India Export (International Fisheries Limited, Lipton India Exports Limited, Merryweather Food Products Limited, TOC Disinfectants Limited, and Lever India Exports Limited) with HLL, the demerger and subsequent disposal of Doom Dooma and TEI plantation divisions, and the amalgamation of Vashisti Detergents Limited with the company.

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