HLL Vs Clorox: Giants of their world! - Views on News from Equitymaster

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HLL Vs Clorox: Giants of their world!

Oct 4, 2005

It is a known fact that the per capita consumption of Indians for every FMCG product is one of the lowest in the world and is lower even than other developing nations. This scenario is despite factoring out the Below Poverty Line (BPL) population. In this article we compare India's largest FMCG company with one of USA's largest FMCG companies to give a perspective of the available potential for Indian FMCG players. About HLL
HIND. UNILEVER is India's largest FMCG company with a dominant presence in almost all consumer categories. The company's turnover at Rs 100 bn is over one third of the total branded/organized FMCG business in India. HLL's brand equity remains unrivalled in India. In the last couple of years, HLL 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. The effects of the initiatives had begun to show in the form of better margins. But 2004 saw competition in its key business of soaps and detergents (45% of revenues) taking a huge toll on margins.

(INR m)CY02CY03CY04CAGR
Net Sales99,549 101,384 99,269 -0.1%
Expenditure79,990 81,617 84,895 3.0%
EBITDA19,559 19,76714,374-14.3%
Operating margin %19.6%19.5%14.5%
Other Income3,845 4,5983,188-8.9%
Net profit after Tax(Loss)17,557 17,71812,012-17.3%
Net profit margin %17.6%17.5%12.1%
EPS8.08.05.5 
P/E ratio (x)    32.9 

About Clorox
The Clorox Company is one of USA's largest FMCG companies. Its total market share in USA at over 20% in dollar terms is the third largest behind Gillette and P&G. The company's laundry additives and home cleaning products are sold in more than 100 countries and are manufactured in plants in North America, South America, Europe, Africa and Asia. The company has a presence in various segments including cleaners, insecticides, shoe polish, bleach, laundry, utensil cleaners and fabric refreshers.Clorox, like HLL, occupies the first or second position in all of its segments it operates in. The company has a Joint Venture in India with Delhi-based Optimum Marketing Metrics (OMM) Pvt Ltd, which imports, distributes and markets the company's product range. In India, Clorox competes with the likes of HLL and Reckitt Benckiser.

(INR m)CY02CY03CY04CAGR
Net Sales176,968 182,336 190,256 3.7%
Expenditure143,528 144,716 151,888 2.9%
EBITDA33,44037,62038,3687.1%
Operating margin %18.9%20.6%20.2%  
Other income1,672 1,232 1,320 -11.1%
Net profit after Tax(Loss)14,168 21,692 24,156 30.6%
Net profit margin %8.0%11.9%12.7%  
EPS60.398.1112.6  
P/E ratio (x)    21.9 
1 USD = 44 Indian Rupees

The company has grown by innovation over the years and cutting costs has been a major focus, which has resulted in it generate savings of more than US$ 275 m. The companys cost structure beats its competitors in every segment including distribution, procurement and marketing. The USP of the company is its R&D and the company has been continuously on the prowl for ideas and technology. Going forward, the company expects sales to grow by around 5% YoY excluding acquisitions if any.

Major Brands
HLLClorox
LifebouyClorox- Wipes (personal cleaning)
LuxPine Sol (home cleaning)
Surf ExcelTilex (home cleaning)
WheelForce flex (plastic bags)
ClinicHidden Valley (sauces)
Close-upSTP (auto care)
Fair & LovelyKingsford (charcoal)
KissanBrita (water filteration)
Per-capita (US)Per-capita (INDIA)
Toothpaste (gms) 518 107
Personal Products(gms)1,475 460
Detergents(kgs) 10 2.5
* Source : Newspapers/Equitymaster Research

As can be seen from the above tables, revenues of Clorox are almost double of that of HLL despite the population of USA being around a third of India. Per capita consumption for almost all products is way below international average.

However, in our view, testing times for the FMCG sector are over and rural penetration is the key, which is currently extremely low, as venturing into these markets is an expensive affair owing to infrastructure constraints, thus making distribution a barrier. Although companies like HLL and ITC have started Project Shakti and E-choupal respectively, they have not been able to tap the rural markets significantly. Owing to the vast growth potential of the sector, companies like Reliance have also decided to jump onto the bandwagon and open retail chains. All these developments come as no surprise. With 12.2% of the world population living in the villages of India, the Indian rural market is a market that is hard to miss.

What to expect?
At Rs 185, the stock trades at 24 times our estimated CY07 earnings and price to sales of 3.6 times. Although at the current juncture, the stock is trading at the higher end of the valuation spectrum, one should adopt the wait and watch policy and hold on to their stocks. The management has indicated in the past its focus on maintaining market share, even if this comes at the cost of margins. With crude prices showing no signs of easing in the near term, the pressure on profitability could be here to stay.

We have been indicating in the past that HLL is in for tough times in the near term. While we foresee the company taking radical steps to improve its performance, the benefits will be visible only over the next couple of years. In our view, based on the current scenario, investors are better off buying other smaller and growing companies in the FMCG space.

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