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HLL: Growth everywhere!
Oct 31, 2006

Performance summary
FMCG behemoth, Hindustan Lever Ltd (HLL), has announced good results for the third quarter ended September 2006. While the topline grew by over 12% YoY during the quarter, lower interest costs and an extraordinary income to the tune of Rs 1,377 m, resulted in bottomline growth of 60% YoY. Barring the extraordinary income, bottomline grew by a respectable 17.7% YoY during the quarter. However, the results for the quarter are not strictly comparable to those of 3CY05 to the extent of integration of subsidiaries ##

(Rs m) 3QCY05 3QCY06 % change 9mCY05 9mCY06 % change
Net sales 27,315 30,660 12.2% 80,742 89,473 10.8%
Expenditure 23,872 26,631 11.6% 71,407 77,993 9.2%
Operating profit (EBDITA) 3,444 4,029 17.0% 9,335 11,480 23.0%
EBDITA margin (%) 12.6% 13.1%   11.6% 12.8%  
Other income 849 968 14.1% 2,389 2,476 3.6%
Interest 48 34 -28.1% 149 89 -40.1%
Depreciation 325 320 -1.4% 953 959 0.6%
Profit before tax 3,920 4,642 18.4% 10,622 12,908 21.5%
Extraordinaty item 6 1,377   (267) 2,880  
Tax 666 812 21.9% 1,777 2,345 32.0%
Profit after tax/(loss) 3,260 5,207 59.8% 8,579 13,442 56.7%
Net profit margin (%) 11.9% 17.0%   10.6% 15.0%  
No. of shares (m) 2201.0 2206.4   2201.0 2206.4  
Diluted earnings per share (Rs)*         8.45  
Price to earnings ratio (x)*         27.9  
* 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 3QCY06?
Across the board growth: Total sales grew by 12.2% YoY during the quarter. FMCG sales grew by 14.2 % YoY, driven by 15.0% YoY growth in HPC business and 10.7% YoY growth in foods. Sales growth in continuing businesses i.e. after eliminating impact of disposals, was 13.8% YoY. While, exports business grew by 19.9% YoY the specialty segment (non-FMCG) witnessed a decline.

Segment revenue snapshot
(Rs m) 3QCY05 3QCY06 Change
Soaps and Detergents          12,429     13,933 12.1%
Personal Products            7,291       8,538 17.1%
Beverages            3,240       3,455 6.6%
Processed Foods               815          973 19.3%
Ice Creams               230          338 47.1%
Exports            2,731       3,274 19.9%
Others (includes Chemicals, Agri, Plantations etc)               894          480 -46.3%
Total Segment Revenue        27,629    30,991 12.2%
Less : Inter segment revenue                 29            25 -15.5%
Net Segment Revenue 27,600    30,967 12.2%

HPC segment: Sales in HPC business grew by 15%, with all categories growing at double digits, driven by volume growth and better mix. Consumer relevant innovations, effective market activation and appropriate brand support continued to be the key levers for growth. Pears, Lux and Dove continued to grow well. Strong growth momentum in laundry wash also continued, with Surf & Rin leading the growth. Shampoos had another successful quarter, with all brands growing robustly. Skin care products too performed well. In all, the personal products witnessed a growth of 17% YoY in this quarter.

Foods segment: The 10.7% YoY growth in the foods segment was led by ice creams and processed food category. The beverages segment grew by 6.6% YoY on the back of strong growth of Taj Mahal, Red label and BrookeBond, which was relaunched. Good growth in Bru instant coffee also aided the performance. Successful brand relaunches drove the processed food growth by 19.3 % YoY, while ice creams witnessed the highest ever-quarterly growth of 47% YoY led by impulse category.

Segment Results (Profit before interest and tax)
(Rs m) 3QCY05 3QCY06 Change
Soaps and Detergents 1,733 1,836 6.0%
Personal Products 2,156 2,409 11.7%
Beverages 567 529 -6.6%
Foods (includes Oils and Fats, Culinary and Branded Staples ) (62) 41 -166.3%
Ice Creams 26 47 79.3%
Exports 20 221 1017.2%
Others (includes Chemicals, Agri, Plantations etc) (85) (61) -28.6%
Total Segment Results 4,355 5,023 15.3%

Stable margins: During the quarter, due to lower raw material costs, the company was able to expand margins by 50 basis points. But, if looked closely, advertising expenditure has increased considerably, due to high investments in brands and brand building and also indicates increasing need to push products due to competition. Other than beverages and food segment, all the products have reported higher PBIT.

Cost break-up
As a % of net sales 3QCY05 3QCY06 9mCY05 9mCY06
Total Cost of goods 55.3% 52.9% 56.2% 53.6%
Staff Cost 6.3% 5.8% 6.3% 5.7%
Advertisement 8.8% 11.1% 9.1% 11.1%
Other Expenditure 16.9% 17.1% 16.8% 16.9%

The extraordinary effect: As can be seen from the first table, bottomline witnessed nearly 60% YoY leap during the quarter. However, a large part of this was due to extraordinary incomes arising as a result of the following

  • Profit from the sale of an investment

  • Reversal of provision for employee related costs at Sewri / Bombay factory consequent to its closure

  • Provision against advance given by HLL to its 100% subsidiary Bon Limited

  • Discounting charge arising from commutation of receivables from LIC under annuity schemes and provision for voluntary retirement schemes all of which added a hefty Rs 1,377 m.

Barring this, bottomline has actually grown by 17.7% YoY, which is still respectable. Lower interest costs and depreciation cost also aided bottomline growth.

All round picture:
  % contribution
to sales
Revenue
growth
PBIT
growth
PBIT
margin (%)
PBIT margin
(decline)/gain (basis points)
Soaps and Detergents 45.0% 12.1% 6.0% 13.2% -76
Personal Products 26.4% 17.1% 11.7% 28.2% -136
Beverages 11.7% 6.6% -6.6% 15.3% -218
Foods (includes Oils and Fats,
Culinary and Branded Staples )
3.0% 19.3% -166.3% 4.2% 1177
Ice Creams 0.8% 47.1% 79.3% 13.8% 249
Exports 9.9% 19.9% 1017.2% 6.8% 603
Others (includes Chemicals,
Agri, Plantations etc)
3.2% -46.3% -28.6% -12.6% -314

What to expect?
At Rs 236, the stock is trading at 27.9 times its 12-months trailing earnings. FMCG market has continued with its growth momentum. Higher volumes and richer mix contributed 3/4th to FMCG growth of HLL. Due largely to selective price increases and cost effectiveness programs, the company has also managed to improve margins. Thus, given the strong brand equity and strong demand potential for its products, we remain positive on the company from a long-term perspective.

Details
## 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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