HLL: Topline blues continue… - Views on News from Equitymaster

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HLL: Topline blues continue…

Oct 25, 2002

FMCG major, Hindustan Lever, has once again reported disappointing topline numbers. Sales in 3QFY03 have fallen by over 7%. But the company's operating margins continue to expand (up 360 basis points), indicating improvement in quality of earnings. The company has reported a marginal 4% growth in net profits. But this is as a result of extraordinary income effect (Rs 215 m) reported in 3QFY02. Excluding extraordinary items effect in both years, the bottomline has actually improved by over 11% YoY.

(Rs m) 3QFY02 3QFY03 Change 9mFY02 9mFY03 Change
Net Sales 25,514 23,675 -7.2% 79,709 73,204 -8.2%
Other Income 1,134 1,062 -6.3% 3,068 2,838 -7.5%
Total expenditure 21,446 19,054 -11.2% 68,334 59,887 -12.4%
Operating Profit (EBDIT) 4,068 4,621 13.6% 11,375 13,317 17.1%
Operating Profit Margin (%) 15.9% 19.5%   14.3% 18.2%  
Interest 25 18 -30.7% 58 78 34.3%
Depreciation 393 313 -20.2% 1,053 1,013 -3.7%
Profit before Tax & extraordinary income 4,784 5,351 11.9% 13,332 15,064 13.0%
Extraordinary income 215 -68 -131.8% 1,640 1,148 -30.0%
Tax 1,007 1,150 14.2% 2,922 3,319 13.6%
Profit after Tax/(Loss) 3,992 4,133 3.5% 12,049 12,892 7.0%
Effective tax rate (%) 21.1% 21.5%   21.9% 22.0%  
Net profit margin (%) 15.6% 17.5%   15.1% 17.6%  
No. of Shares (eoy) (m) 2200.6 2201.2   2200.6 2201.2  
Earnings per share* 7.3 7.5   7.3 7.8  
*(annualised)            
Current P/e ratio (incl. Extraordinary income)   21.4     20.6  

HLL's domestic HPC (household and personal care) business has reported a healthy 5% growth in topline, aided by power brands which grew by 6.8% YoY. In this business, Lifebuoy, Lux, Wheel, Fair & Lovely, Ponds, Pears and Lakme, all recorded double digit growth. Exports continued to shrink due to planned dicontinuation of traded exports (down 33% YoY).

Sales break-up
(Rs m) 2QFY02 2QFY03 % change 1HFY02 1HFY03 % change
Domestic FMCG - HPC 14,863 15,590 4.9% 46,130 47,458 2.9%
Domestic FMCG - Foods (incl. ice-creams) 5,794 4,885 -15.7% 17,287 15,555 -10.0%
Domestic FMCG - Total 20,657 20,476 -0.9% 63,417 63,014 -0.6%
b) Exports 4,200 2,801 -33.3% 13,615 8,875 -34.8%
c) Others 657 398 -39.5% 2,677 1,315 -50.9%
Total 25,514 23,675 -7.2% 79,709 73,204 -8.2%

HLL's soaps and detergents business grew by 2.8%, led by a strong personal wash growth of 11.1%. Lifebuoy and Lux performed exceptionally well, and grew by 35% and 11% respectively. Personal products grew strongly by 9.5% led by a 48.6% growth in the skin category. Fair & Lovely, Ponds and Lakme, all recorded an excellent performance growing by 43%, 11% and 16% respectively. The declining trend in Shampoo sales was reversed by a successful relaunch of Clinic. In oral care, market shares were steady although sales declined during the quarter.

Segment revenue snapshot
(Rs m) 3QFY02 3QFY03 % change 9mFY02 9mFY03 % change
- Soaps and Detergents 10,315 10,622 3.0% 31,515 32,526 3.2%
- Personal Products 4,590 5,083 10.7% 14,729 15,241 3.5%
- Beverages 3,362 2,703 -19.6% 10,461 9,138 -12.6%
- Foods (includes Oils and Fats, Culinary and Branded Staples ) 2,028 1,842 -9.1% 5,501 5,216 -5.2%
- Ice Creams 330 232 -29.6% 1,243 900 -27.6%
- Exports 4,200 2,801 -33.3% 13,615 8,875 -34.8%
- Others (includes Chemicals, Agri, Plantations etc) 1,492 863 -42.2% 4,898 2,615 -46.6%
Total Segment Revenue 26,316 24,147 -8.2% 81,961 74,511 -9.1%
Less : Inter segment revenue 739 283 -61.7% 2,067 714 -65.4%
Net Segment Revenue 25,577 23,864 -6.7% 79,895 73,797 -7.6%

The company continues to stress on improving the profitability in each of the categories it operates in. Consequently, HLL has improved its PBIT margins across most of the product segments (see table). Except for foods and the others category, the company has improved its PBIT margins in all categories. Infact, ice-creams have seen over 900 basis points PBIT margin expansion in the nine months ended September 2002 on a YoY basis. In foods, though culinary did well, the overall performance was overshadowed by the competitive pressure on its staples business. The branded staples category has seen new players like Shakti Bhog, ITC, Nature Fresh and Healthy World entering the fray, in competition with existing players like Pillsbury and Annapurna.

The big picture…
  % contribution
to 9mFY03 sales
Turnover
growth
PBIT
growth
PBIT
margin (%)
PBIT
margin growth
(basis points)
Soaps and Detergents 43.7% 3.2% 18.6% 24.6% 319
Personal Products 20.5% 3.5% 15.2% 32.9% 334
Beverages 12.3% -12.6% 10.9% 19.0% 403
Foods (includes Oils and Fats, Culinary and
Branded Staples )
7.0% -5.2% - -4.3% -309
Ice Creams 1.2% -27.6% - -4.9% 941
Exports 11.9% -34.8% 25.3% 6.5% 311
Others (includes Chemicals, Agri,
Plantations etc)
3.5% -46.6% - -0.8% -816
*taken 9 month figures as base          

On a like to like basis, the company has reported over 5% dip in topline during the September quarter and PAT has grown by 11% during this period YoY. PBIT is up a healthy 16%.

Results on like to like basis
(Rs m) 3QFY02 3QFY03 Change 9mFY02 9mFY03 Change
Net sales 25,025 23,675 -5.4% 78,172 73,137 -6.4%
PBIT 3,904 4,539 16.3% 10,630 12,994 22.2%
PAT 3,786 4,201 11.0% 10,061 11,741 16.7%
Net margin (%) 15.1% 17.7%   12.9% 16.1%  

The stock has tanked to new lows due to continued pressure on topline and bottomline growth, notwithstanding the power brands improved performance. At the current price of Rs 161 the stock trades at 20.6x annualised 9mFY03 earnings, a valuation when compared with other peers is still on the higher side. However, the benefits of HLL's restructuring will become clear only next year onwards, when a real time YoY comparision will be possible. All said and done, we continue to believe that over the long term, HLL will continue to dominate the FMCG scene in India. Post the current restructuring, HLL is likely to come out trimmer and more profitable.


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