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  • APRIL 9, 2002

HLL: Bogged down by short term concerns

FMCG major, Hindustan Lever (HLL), is slated to declare its first quarter results on April 15. However, the excitement that was built up post its heartening turnover growth in 4QFY02, has been dented. The management has already warned of a sluggish topline in the March quarter.

Earlier, HLL's parent Unilever had indicated that their emerging markets business has been relatively weak in 1QFY03. Within that, the Indian business (read HLL) has witnessed a decline in underlying volume sales in the first two months of the current quarter.

The key reason for the sluggish topline expectation is a one time shortening of inventory in the distribution pipeline, in an effort to rationalise the supply chain. The management has indicated that this process is now almost complete and the one-off effect will be felt only in the March quarter. Last year this system also called RS NET was implemented in the soaps and detergents business, that is now extended across all categories. This extension will improve HLL's working capital management further and allow higher margins.

Market expectations for the topline growth in 1QFY03 range between 1.5%-3% and between 12-15% for bottomline growth. Our full year (FY03) estimates stand at 5% topline growth and around 9% bottomline growth (excluding any extraordinary income that may arise later). This conservative 9% growth in bottomline has come despite estimating an improved operating margin from 15.6% in FY02 to 17% in FY03E.

The stock has declined by nearly 15% to Rs 225 levels currently. Based on our estimated EPS (excluding extraordinary income or expenses) of Rs 8.1 in FY03, the stock trades at 28x FY03E earnings. Though any improvement in consumer sentiment may improve topline and bottomline growth going forward, as of now there seem no signs of it. That said, in the longer term, the management's efforts in rationalising its businesses, products and brands are likely to keep HLL at the forefront of the FMCG spectrum. The company will be the foremost beneficiary of a turnaround in rural demand.

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