The Hindu Business Line : HLL back in the driver's seat

THE numbers that HLL unveiled on Tuesday should pleasantly surprise even those already expecting a revival in the FMCG giant's fortunes. With 11 per cent growth in net sales for 2005, it has gone straight from shrinking sales last year to double-digit sales growth this year.

Sales growth in the quarter ended December, at 14.4 per cent, has been better than that of some smaller competitors - no mean feat given its size and dominant market share.

Rising urban spends, returning pricing power, and an unexpected resurgence in rural demand have helped resurrect HLL's recent numbers. Profit growth for 2005, not reckoning exceptional items, was at 13 per cent.

With its key inputs on an inflationary mode, the company's profits have struggled to keep pace with its sales for most of 2005. But even on this score, the numbers for the December quarter offer room for optimism.

Operating profit, which remained stagnant in the preceding three quarters, has expanded by about seven per cent in this quarter. Growth in net profit, excluding exceptional items, was at about 22 per cent for the quarter.

Profit margins appear to have benefited from an improved product mix and judicious price increases of products. Profit growth would have been higher if it had not sharply increased its adspend, which went up by an unprecedented 50 per cent in the quarter under review due to a slew of brand extensions and relaunches.

Rural resurgence: An unexpected resurgence in the rural offtake of conventional FMCGs such as soap, shampoo, and toothpaste over the past two quarters may have played a key role in the better-than-expected numbers.

Until the middle of 2005, rural offtake of FMCGs was flagging, even as urban consumers were upgrading to premium products.

This helped smaller FMCG companies with a distinct urban focus outperform players with a national footprint such as HLL.

With the rural markets in the growth mode, extensive rural reach may now work in the company's favour.

Drawing on Unilever's strengths: The turnaround in parent Unilever's earnings for the quarter ended December and the Indian arm's significant role in this turnaround is also a positive.

HLL can now demand a larger share of the parent's resources, draw more actively from its brand portfolio and, possibly, use its manufacturing strengths to supply to Unilever's global operations.

All this could help dispel the notion that a company of its size is destined to under-perform its smaller rivals in the FMCG space.

Over the past year, stock market valuations of homegrown FMCG companies such as Dabur India and Marico Industries have caught up with that of HLL, due to the latter's lower growth trajectory.

But the eight per cent rise in its stock price on Tuesday, the biggest ever single-day move for the stock, restores HLL's premium valuations.