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HLL: Margin woes continue - Views on News from Equitymaster
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  • Oct 28, 2004

    HLL: Margin woes continue

    Introduction to results
    FMCG behemoth, Hindustan Lever (HLL), has declared its September quarter numbers. The company has reported a over 3% dip in topline, which is somewhat better than the 4.8% dip it saw in the June quarter. But price competition continues to take a big toll on its operating margins (down over 5% YoY). Consequently, profits have dipped by nearly 27% during the quarter.

    (Rs m) 3QCY03 3QCY04 Change 9mCY03 9mCY04 Change
    Net sales 24,830 24,011 -3.3% 75,549 73,261 -3.0%
    Expenditure 20,068 20,625 2.8% 61,885 63,087 1.9%
    Operating profit (EBDITA) 4,761 3,387 -28.9% 13,664 10,175 -25.5%
    EBDITA margin (%) 19.2% 14.1%   18.1% 13.9%  
    Other income 1,117 857 -23.3% 3,588 2,273 -36.7%
    Interest 313 341 9.0% 344 977 183.6%
    Depreciation 296 301 1.7% 919 878 -4.4%
    Profit before Tax 5,269 3,601 -31.7% 15,989 10,592 -33.8%
    Extraordinary income/(expense) 351 419 19.3% 351 219 -37.5%
    Tax 1,188 776 -34.6% 3,569 2,175 -39.1%
    Profit after Tax/(Loss) 4,432 3,243 -26.8% 12,771 8,637 -32.4%
    Net profit margin (%) 17.9% 13.5%   16.9% 11.8%  
    No. of Shares (m) 2201.2 2201.2   2201.2 2201.2  
    Diluted Earnings per share (Rs)* 8.1 5.9   7.7 5.2  
    Price to earnings ratio (x)         23.5  
    *(annualised), CY = Calendar Year              

    What is the company’s business?
    Hindustan Lever Limited is India’s largest FMCG company with a dominant presence in almost all consumer categories. The company’s turnover at Rs 100 bn is nearly half of the total branded / organized FMCG business in India. HLL's brand equity remains unrivalled in India. However, 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 affects of the initiatives had begun to show in the form of better margins. But 2004 sure seems different, with competition in its key business of soaps and detergents (44% of revenues) taking a hugh toll on margins.

    What has driven performance in 3QCY04?
    Sales: While sales grew by nearly 3% for the company's HPC (personal products, soaps and detergents) business, its foods business (including ice-cream) reported a 12% dip in revenues during the quarter. However, HPC volume growth was much stronger at 6% on the back of enhanced brand investments. Brooke Bond, accounting for 90% of tea sales grew by 5%. Overall, beverages sales growth (down about 1%) was impacted by the discontinuation of ‘A1' brand.

    Results on like to like basis
    (Rs m) 3QCY03 3QCY04 Change 9mCY03 9mCY04 % change
    Net sales 24,313 24,011 -1.2% 73,363 73,261 -0.1%
    PBIT 4,814 3,349 -30.4% 14,087 10,251 -27.2%
    PAT 4,072 2,825 -30.6% 12,449 8,418 -32.4%

    Soaps and detergents (45% of revenues) grew by nearly 4% during the quarter. The company's foods business halved during the quarter, largely owing to discontinued businesses. The company's other big revenue contributor, personal product business (24% of sales) hardly saw any value growth. On the volume front however, HLL's shampoo volumes grew by over 40% and laundry volumes by 9% YoY during the quarter. The performance is a pale shadow of the growth momentum (up 15% YoY) this business had witnessed during 2003. The company's much vaunted 'processed food' initiative seems to have been put on the back burner.

    Segment revenue snapshot
    (Rs m) 3QCY03 3QCY04 Change 9mCY03 9mCY04 Change
    Soaps and Detergents 10,725 11,131 3.8% 32,841 33,228 1.2%
    Personal Products 5,825 5,853 0.5% 17,217 17,755 3.1%
    Beverages 2,937 2,914 -0.8% 8,755 8,639 -1.3%
    Foods (includes Oils and
    Fats, Culinary and Branded Staples )
    1,503 611 -59.3% 4,944 2,229 -54.9%
    Ice Creams 218 207 -5.1% 777 759 -2.3%
    Exports 2,881 2,957 2.6% 9,135 9,288 1.7%
    Others (includes Chemicals,
    Agri, Plantations etc)
    1,069 654 -38.9% 2,776 2,329 -16.1%
    Total Segment Revenue 25,158 24,327 -3.3% 76,445 74,227 -2.9%
    Less : Inter segment revenue 82 47 -43.1% 290 194 -33.0%
    Net Segment Revenue 25,076 24,281 -3.2% 76,155 74,033 -2.8%

    Operating margins: HLL's margins had seen a consistent uptrend since 1998 (see chart). The company's restructuring efforts were focused totally on right sizing its brand folio and on profitability. At the start of 2004, the HLL management had indicated that the company had attained the desired level of profitability and would now like to concentrate on topline growth. But price war in its key business of soaps and detergents, initiated by rival P&G, took a toll on this strategy. Margins had declined drastically for soaps and detergents segment during the June quarter (PBIT margins shrunk from over 24.0% in June quarter last year to 14.5% this quarter). The performance in September quarter is hardly any different (PBIT margins down from 23.8% to 14.8%). Personal products too witnessed a small dip in margins. HLL has had to push its products through enhanced advertising (ad expenses as a percentage of sales grew from 9.1% in 3QCY03 to 9.6% of sales in 3QCY04).

    Net profit: The company's bottomline has been hit on many fronts this quarter. Apart from feeble margins, increased interest burden (owing to 9% debentures to shareholders) and lower other income, contributed to the bottomline debacle. Had it not been for increased extraordinary income (largely due to disposal of land to the tune of Rs 720 m), profits would have fallen further.

    Over the last five quarters
      3QCY03 4QCY03 1QCY04 2QCY04 3QCY04
    Sales growth (YoY) 4.2% -1.9% -0.7% -4.5% -3.3%
    Advertising as % of sales 9.2% 8.6% 8.7% 11.4% 9.6%
    OPM (%) 19.5% 23.6% 15.3% 12.4% 14.1%
    Net profit growth (YoY) 7.2% 2.9% -23.0% -45.8% -26.7%

    What to expect?
    At Rs 123, the stock trades at 24x annualised 9mCY04 earnings, market cap. to sales of 2.8x. Though the company's September quarter performance is a shade better than its June quarter, the easing of margin pressure is not evident as yet. Pressure on margins of both soaps and detergents and personal products is likely to ease going forward, with both P&G and HLL starting to hike prices of some of their brands. However, new entrants in the business (LG) and P&G's proposed entry into oral care should be viewed with caution over the short term.

    The big picture…
      % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin growth (basis points)
    Soaps and Detergents 44.8% 1.2% -28.8% 16.4% (689)
    Personal Products 23.9% 3.1% -2.6% 32.4% (190)
    Beverages 11.6% -1.3% 3.0% 19.6% 82
    Foods (includes Oils and Fats,
    Culinary and Branded Staples )
    3.0% -54.9% - -21.3% (2,048)
    Ice Creams 1.0% -2.3% - -1.1% (852)
    Exports 12.5% 1.7% -35.2% 2.6% (150)
    Others (includes Chemicals,
    Agri, Plantations etc)
    3.1% -16.1% - -9.4% (596)
    *Based on 9mCY04 numbers          



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