The Hindu Business Line : Growth returns to HLL

IT was widely expected that Hindustan Lever Ltd (HLL) would return to profit growth after five consecutive quarters of dwindling profits; and it has not disappointed. The base effect of the price cuts on key detergent and shampoo brands in 2004 wore off by this March. Interest costs have also shrunk as the bonus debentures were redeemed. The company took small price increases of between 5 and 7 per cent on select shampoo and detergent brands in May, which pegged up realisations this quarter.

There are however, quite a few surprises in HLL's quarterly numbers. The company's sales have gained traction at a pace that is better than expected, growing by 11.9 per cent this quarter. This suggests that the strong revival in FMCG demand that was evident in the first quarter of this year, was not merely a flash in the pan. Sales growth numbers from several of the company's competitors also confirm a trend of reviving demand for consumer goods.

The quality of HLL's earnings also improved, as profit growth received little help from treasury activities and came mainly from operations. The usual slew of mergers and divestitures that tend to impact the comparability of its numbers, were also absent this quarter. Strong sales growth for HLL, however, was not matched by expansion in its operating profits, which grew by a mere 4.2 per cent. Profits from soaps, detergents and personal products were just about maintained, despite the expansion in sales. This suggests that the rising input prices continue to trouble the company, and were only partially compensated by the price increases in May.

HLL seems to be reasonably established on the path to growth. Volume growth for FMCGs, inching up since last year, appears to be returning to the double digits. There is also evidence that consumers are finally becoming less price-conscious with their FMCG purchases. Volume growth for detergents and shampoos is strongly up this quarter, despite price hikes.

It is also a good sign that players are abandoning their price-driven strategies, to try their hand at some serious innovation. HLL itself has rolled out several high-end products in recent months in the skin care and shampoo segments. With its dominant shares in many FMCG categories, the company will be a key beneficiary if the FMCG market is in an expansionary mode.

However, after the 25 per cent run-up over the past three months, the HLL stock is likely to pause for breath. Italready trades at a valuation premium to most of its peers. Yet, due to its large base, HLL's growth rates, going forward, are unlikely to be as impressive as some of its competitors. With a small base and a focus on niche segments, smaller companies will find it far easier to report a sharp ramp-up in sales and profits, than HLL.

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