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Tuesday, Jul 23, 2002

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HLL: Incipient signs of revival?

Aarati Krishnan

THE second quarter of fiscal 2002 appears to have brought some colour back into Hindustan Lever's performance.

True, net sales have continued to shrink, declining by 9.3 per cent in the second quarter (against 9.9 per cent in the first).

But much of the shrinkage in sales in the June 2002 quarter was on account of cut-back in low margin traded exports, which is a deliberate attempt at restructuring by HLL.

Domestic FMCG sales for the quarter actually grew by 1.7 per cent, after declining by 5.4 per cent in the first quarter.

The segment-wise performance reinforces this impression. In the second quarter of 2002, HLL has managed positive growth in personal wash (11.6 per cent growth against 6.1 per cent shrinkage in the first quarter), fabric wash (2.7 per cent growth against shrinkage of 5.2 per cent), and personal products (0.7 per cent growth against a 7.8 per cent shrinkage in the first quarter).

Sales growth in categories such as skin care revived to double digits.

The sales growth in soaps and detergents has probably been achieved through aggressive relaunches of Breeze, Lifebuoy and Lux, which have been accompanied by increases in selling prices.

In personal products, the sharp reduction in excise duty in the March 2002 Budget has forced HLL to prune selling prices of cosmetics by around 6 per cent.

That the category has witnessed a positive revenue growth despite this is testimony to the fact that the reduction in prices has pepped up volumes.

Foods, ice-creams and beverages continued to register disappointing sales performance as many of these categories were hit by low commodity prices and competition from regional brands.

While sales growth has staged a tentative revival in the second quarter, operating profit margins have continued to expand, as in the previous quarter.

Though reported net profit has dropped, this is largely on account of "exceptional income." For the June 2002 quarter, HLL's net profit before exceptional items rose by 22 per cent (on continuing businesses).

For the June 2002 quarter, HLL's operating profit margins vaulted from 16.4 per cent to 18.6 per cent. While other components of cost remained more or less unchanged, HLL's spending on outsourced goods halved during the quarter, playing a key role in bolstering margins.

In fact, the sharp drop in the "purchased goods" component has been a continuing trend in HLL's profit performance over the past year.

This could indicate that substantial savings are beginning to materialise from the last leg of HLL's supply chain initiatives, which aim to prune inventory at the supplier end.

Or it could indicate that HLL is actually cutting back on outsourcing to step up its own manufacturing capabilities.

Going forward, an erratic or delayed monsoon could play spoilsport to HLL's sales revival.

However, the recent resurgence in prices of commodities such as edible oils and foodgrains could help HLL effect selling price increases, which the low-inflation environment has denied for some time now.

On overall analysis, the quarter's financials reinforce the impression that the operational and marketing initiatives taken by HLL are beginning to pay off.

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