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HLL: The key to success? - Views on News from Equitymaster
 
 
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  • Dec 4, 2000

    HLL: The key to success?

    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.

    Financial Snapshot
    Year End December 9 Months 4 years
    (Rs m) 1997 1998 1999 2000 CAGR
    Net Sales 58,050 71,380 76,453 79,560 11.1%
    Other income 1,118 1,429 2,044 2,596 32.4%
    Total Income 59,168 72,809 78,498 82,156 11.6%
    Operating Profit 6,599 9,178 10,756 12,516 23.8%
    Interest 231 245 174 87 -27.8%
    Depreciation 419 804 1,016 964 32.1%
    Profit Before Tax 5,950 8,128 9,566 11,465 24.4%
    Tax 1,900 2,238 2,318 2,650 11.7%
    Net Profit 4,050 5,891 7,248 8,815 29.6%
    No. of shares (m) 2,196 2,196 2,196 2,201  

    Key Ratios
    Particulars 9mths 97 9mths 98 9mths 99 9mths 00
    Operating profit margins 9.4% 10.9% 11.4% 12.5%
    Net profit margins 7.0% 8.3% 9.5% 11.1%
    Tax / PBT 31.9% 27.5% 24.2% 23.1%
    Cash EPS (Rs) * 2.75 3.98 5.01 5.91
    EPS (Rs) * 2.50 3.49 4.39 5.33
    * annualised

    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.

    Comparative past valuations
    Particulars FY98 FY99 FY00 FY01E
    P/E (x) 50 43 46 34
    Market Cap / Sales (x) 3 3 4 4
    Earnings growth 40.6% 43.8% 32.8% 19.1%
    PEG Ratio 1.2 1.0 1.4 1.8

     

     

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