The FMCG giant HLL has shown excellent performance over the years. HLL within the Unilever fold has been recognised as one of the best companies and is known for its management talent. The company with more than 115 brands enjoys a market leadership in soaps, detergents, color cosmetics, ice creams and staple foods.
HLL has consistently improved its financials year over year. During the past four years HLL’s profits grew at a compounded annual growth rate (CAGR) of 30%, which is faster than the growth in the sales (CAGR 11%). However, in recent quarters HLL has witnessed a slowdown in topline growth due to a consumer down trading.
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The operating margins of the company improved remarkably in the past four years because of material cost reductions and overall supply chain savings. Further tax savings on accounts of exports contributed in pushing the bottomline growth. HLL's strong export growth was led by home & personal care, beverages and marine products business. The FMCG sector in India is witnessing intense competition from unorganised players. Although the company is well geared and is taking steps to consolidate its market share in various segments, margins could come under strain in the future.
HLL has identified low unit price packs as its thrust area with a view to increase penetration and to improve topline growth. This has helped it to boost volumes in rural areas. The company derives more than 50% of its revenues from rural areas where demand for its products is growing five times faster than in urban markets. However, lower agriculture growth negatively affects the consumption pattern of the rural India. This is expected to hit its turnover growth in the next few years.
The company’s beverages business contributes around 13% of sales. The segment is growing at a faster rate (14%) compared to its home and personal care business (5%). To boost its tea business, HLL has identified ‘out of home’ as an important channel to drive the growth. During the year the company has increased number of vending machines for its hot beverages and is planning to launch tea in a tablet form. However, the company’s revenues, especially in commodity businesses like tea and coffee, are subject to international price cycles. This adds uncertainty to revenues and profits from this division.
At the current market price of Rs 195 HLL is trading at a P/E multiple of 34 times its December 2001 projected earnings, with a market cap to sales ratio of 4 times. Historically, the company has traded in the P/E range of 45-50 times. We have projected a profit growth of 19% on the sales revenues in the range of Rs 114 bn (growth of 5%) for FY01. The future premium valuations of the company depend on its ability to maintain its performance, which again is related to economic growth rate. However, the initiatives taken by the company to frequently launch and re-launch new products, continuous cost reduction and growth through acquisitions could lead to better performance in the next few years.
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