The Hindu Business Line : Rising costs rob HLL numbers of gloss

IT'S a bland platter that HLL has served up for the final quarter of 2003. Net sales growth dipped to 2.2 per cent in the December quarter, after peaking at 6.8 per cent in the September quarter. This mars the trend of steadily improving sales growth set by HLL over the preceding seven quarters. With sales growth winding down and margins slow to expand, sustainable net profits have not grown.

A blip in growth rates from soaps, detergents and exports, were the key dampeners in the December quarter, neutralising better sales numbers from personal products and foods. The dip in export growth rates may merely be the result of an uneven phasing of export orders through the four quarters of the year.

Slippage in soaps

But the shrinkage of 2.9 per cent in soap and detergents sales is worrying. The segment accounts for 42 per cent of HLL's sales and should have been the first to capture any spill-over effect on rural demand from the good monsoon.

The acceleration in sales growth from HLL's bugbear, the foods business, to 24 per cent in the December quarter, is heartening. But this is tempered by the slippage in the beverages business, which shrunk in the December quarter, after perking up in the previous quarter with the Brooke Bond re-launch.

Power brands deliver

For the full year 2003, HLL's sales growth has perked up, with the "power" brand re-launches jogging up its growth numbers. HLL managed to grow its net sales by 4.3 per cent for the year, after reporting a shrinkage of 4.8 per cent in net sales in 2002. Given the size of HLL's operations, this is an impressive show.

The improvement in growth rates can be traced mainly to the power-brand strategy. Over the past eight quarters, HLL has been systematically taking up its power brands, one at a time and has re-formulated and re-launched them. This has delivered an immediate spike in sales growth numbers. But sustaining the double-digit growth rates over long periods of time has proved a challenge, with price competition intensifying.

Marching costs

While sales growth has improved in relation to 2002, profit growth has distinctly slowed. HLL's sustainable net profits for 2003 have risen by just 3.2 per cent, after expanding by 14.2 per cent in 2002.

Rising commodity prices (on such inputs as chemicals and palm oil derivatives) and a spike in "other expenditure" appear to have stalled margin expansion, nullifying the savings in adspend. In 2003, HLL managed to slash its adspend by Rs 98 crore, with centralised media buying and a focus on fewer brands. But purchase costs rose by Rs 123 crore and "other expenditure" by Rs 192 crore, making sure that operating profits expanded only by 5.8 per cent.

In the near term, two external factors may work to HLL's advantage.

For one, since the raw material price spiral was well under way by January 2003, so commodity prices may make less of an impact on HLL's numbers in the coming quarters.

The marginal price increases that HLL has taken on its soaps and detergent brands in recent months may help.

Second, with the rabi marketing season just beginning, there may still be some hope for HLL from the monsoon spill-over effect.

But if the sales growth continues to taper as it has done in December, HLL's performance will remain unexciting, especially at a time when scorching growth rates seem to be the norm in India Inc.

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