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Consolidation through acquisitions - Views on News from Equitymaster
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  • Dec 30, 1999

    Consolidation through acquisitions

    If there is a single common factor across the portfolios of India's leading fund managers, it has to be Hindustan Lever Ltd. (HLL), India's largest company in market capitalisation. Over the years, the company's stock has stood like a rock, regardless of the economic condition in the country, and has often single-handedly lifted the Sensex, when most other blue-chips were falling like nine pins around it. From 1994 to 1998 the company has declared an average dividend of 130 percent per share and has rarely if ever disappointed its investors.

    Being in the fast-moving consumer goods (FMCG) business, HLL's performance is relatively insulated from the economic mood prevailing in the country, unlike other cyclical sectors (cement, steel) which are affected by the economic condition in the country. Fund managers pick HLL for what they opine is the company's most valuable asset - its management. Acknowledged for its focus and foresight, the company has bred managers like S. M. Dutta, who was the brains behind HLL's acquisition spree in 1992 to 1996 (TOMCO, Kwality, Brooke Bond, Kissan) and now Keki Dadiseth who has carried off from where his predecessor left off (Lakme, Industrial Perfumes).

    The second most potent weapon in HLL's armoury is its umbrella of brands. The company has got brands that compete across segments ranging from beverages (Lipton, Brooke Bond, Bru, Taj Mahal), detergents (Rin, Surf, Wheel, Vim, Omo), personal products (Sunsilk, Clinic, Close-up, Pepsodent, Ponds, Aviance, Lakme, Fair & Lovely), soaps (Lux, Lifebuoy, Pears, Dove), oils (Dalda, Flora, Anic), staple foods (Annapurna), frozen foods (Walls, Kwality) and culinary products (Kissan). HLL's brands vie for market share with some really formidable companies like Colgate (oral care), Procter & Gamble (soaps, feminine hygiene, detergents), Marico (hair oil), Tata Tea (tea), Godrej (soaps, foods), Nestle (coffee, culinary products), Nirma (soaps, detergents) Vadilal (frozen foods) and Reckitt & Colman (surface cleaners).

    Another one of HLL's enviable fortes is its extensive distribution network (over 1 m retailers), which explains how the company wins half the battle based on its distribution strength alone. It also explains how brands like Rin, Surf and Lux, are as easily available in India's most obscure villages, as they are accessible in the country's leading metropolises. The company has entered into relatively new areas like culinary products, oral care and hair oil and has grabbed market share by shrewdly leveraging its distribution network. It is not surprising, that over the years, HLL has become something of a marketing institution in the country that breeds top marketing managers, which are then poached by other FMCGs.

    With its sustained growth over the years, HLL has become an important jewel in the Unilever crown. Currently, HLL accounts for 4 percent of Unilever's turnover and 5 percent of its revenues. In fact, the latter even pays royalty to HLL for development of Fair & Lovely (fairness cream), which is being sold in international markets.

    Whereas, HLL's growth over the long term is relatively assured, there could be some blips on the way if rural demand weakens due to poor agricultural growth. After dominating the personal care products for such a long time, the company has how identified the foods business (biscuits, ready-to-eat chapatis) as the engine for its growth. However, it remains to be seen whether the company will be able to change the eating habits of the consumer, as Captain Cook did with ready-made atta (flour). Moreover, the country's cold storage system is yet undeveloped, and this could dampen the company's penetration plans.

    But, HLL's financial performance is bright as ever. Third quarter results for the financial year 2000 saw the company post a 20.7 percent jump in net profit. Its domestic and personal care business (soaps, detergents, household care and personal products reported 13 percent volume growth while the food segment (excluding tea and oils and fats) witnessed 15 percent. Analysts are very bullish on the company's growth prospects for financial year 2000 and expect its net profit to break the Rs 10 bn mark.

    This is more good news for HLL's investors. HLL will continue to look at acquisitions to fuel growth in future, which is bad news for its competitors, both current and potential. If past record is any indication, it is likely to come out tops in its ventures, leaving competitors with no choice but to stare helplessly as the HLL-juggernaut passes them by.



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