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HLL: In diversification mode

Dec 20, 2000

The FMCG giant HLL has decided to restructure its brand portfolio and take up new businesses. The decision of the company is on the back of flagging topline growth. During the nine months ended September 2000, the company’s revenues increased by a mere 4%.Lower agricultural growth negatively affected the consumption pattern of rural India. This coupled with a consumer down trading resulted in a drop in the company’s volumes. As a result, HLL is evaluating the feasibility of entering several new businesses to fuel its sales growth. These include confectionery, consumer healthcare, water and opportunities on the Internet.

HLL’s plan to invest in the Internet, particularly in B2B is expected to improve its margins significantly. It will also bring supply chain efficiencies to the company. HLL will invest about Rs 1 bn every year on e-ventures and 80% of that in B2B. Once the televisions are linked to the Internet, it will enable FMCG companies to reach out even to the rural areas. The result of focusing on the Internet is reflected from the increasing operating margins. During the nine months ended September 2000, HLL’s operating margins improved by 107 basis points to 12.5%.

Excellent returns
Year ending December FY98 FY99 FY00 FY01E
RONW 44.4%47.0%50.9%51.9%
ROA 15.9%18.5%21.0%24.8%
ROIC 41.0%42.2%47.9%50.8%

Along with identifying new business areas, HLL is also focusing on pruning its strong portfolio of 110 brands. The company could dispose of some of its brands and migrate the other small brands to larger brands. The exercise is similar to the one announced earlier this year by its parent Unilever which aims to focus on its 400 core brands.

The future prospects for HLL are expected to improve with its ability to widen product base in lower price segment, successful ventures into new business areas, product innovation and greater market penetration. The company’s foray into branded staples, ice creams and e-commerce have the potential to rejuvenate dwindling growth rates. However, the company’s move to enter into several new areas may result in the lack of focus to its core business areas.

At the current market price of Rs 203 HLL is trading at a P/E multiple of 35 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.

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