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Hind Lever warning shows FMCG cos are on slow track

Our Bureau

MUMBAI, April 1

EQUITY analysts are expecting a trying year for fast-moving consumer goods (FMCG) major, Hindustan Lever Ltd (HLL), which warned today of a weak topline growth for the March quarter (MQ) of 2002, the first quarter of its ongoing financial year.

In trying to explain the overall situation, analysts confess to a shortage of data for painting an accurate image of what is going on in India's semi-urban and rural markets, regions critical for business growth at HLL.

With the old story of divergent sales trend — handsome 2-wheeler sales in the hinterland but customers there seemingly reducing offtake of soaps and detergents — still doing the rounds, there is suspicion that HLL may also be a victim of "downtrading" and sniping by the unbranded sector.

Packet tea, for instance, is known to face a sectoral threat from unorganised players selling cheap teas in the market place.

"That possibility can't be ruled out," an analyst at a leading brokerage, said, reminding, however, that the base quarter against which HLL's March quarter 2002 was being compared had been a good one.

In a statement to the Bombay Stock Exchange, HLL said: "After a very good performance last year led by our strategy to focus on our power brands, we have

had a slow start to this year. Sales in the March quarter of 2002 will be below the corresponding period last year, due to both external and internal factors.

"We will, however, deliver a reasonable growth in our operating profit for the quarter." According to HLL, the markets remain sluggish with several of its product categories, notably personal wash, laundry and tea, continuing to show de-growth. Reflecting this, the retail trade has brought down stock investments.

HLL says it is also taking several operational initiatives which are resulting in a lower topline in the immediate term.

"First, we are determined to improve the profitability of our foods business just as we did for our beverages business last year," the company said. It plans to improve gross margins by focussing on its more profitable stock keeping units (SKUs), stopping the unprofitable ones.

SKUs concern the size of HLL's packs and the move is basically a rationalisation of pack sizes. The company is also simultaneously investing in value-added innovations.

Analysts explained that last year, in beverages, HLL had got out of traded tea and cut its attention on some low-end brands, to improve business profitability.

HLL further said: "We will now focus our salesforce only on driving secondary sales — sales from our stockists to the retail trade. We are using IT to connect all our stockists to our supply chain so that we can run a replenishment-based system. This rollout has led to a planned decrease in our stockists' inventories with an adverse impact on the short-term topline. However, this will lead to a much more responsive and efficient supply chain."

According to analysts at one brokerage, HLL will be moving more of its home and personal care (HPC) products through its IT initiative — RS Net. The share of HPC products using this route is projected to go up from the current 40 per cent to 80 per cent by next quarter, they said, pointing out along side its impact on revenues, HPC being a major contributor to HLL's turnover.

Discontinuation of traded exports is also projected to impact HLL's topline growth in the March quarter. Marine products used to be the dominant item in its portfolio of traded exports.

"Traded exports do not add anything to our bottomline; they only consume management resources," the company has said. Analysts reckon traded exports contributed about Rs 250 crore to HLL's topline.

According to HLL, its innovation plan in the March quarter this year is relatively light compared to the rest of the year. Consequently, its advertising and promotion (A&P) spend as well as sales phasing is backweighted into the year.

But for analysts, the more A&P spend shifts into the latter half of the year, the greater is the need for those quarters to return good sales turnover.

Besides, this year, HLL will have to tackle a tough market scenario using its core business portfolio, non-core businesses such as agri-seeds and industrial chemicals having merited divestment.

For year 2001, HLL had reported a 25.3 per cent increase in net profit to Rs 1,641.31 crore (Rs 1,310.09 crore) with net sales growing by 3.5 per cent to Rs 10,972 crore.

Leading constituents of turnover were soaps, detergents, scourers at Rs 4,094 crore (Rs 4,214 crore), personal products at Rs 2,259 crore (Rs 1,833 crore), beverages at Rs 1,921 crore (Rs 1,987 crore), branded staple foods at Rs 243 crore (Rs 269 crore) and ice cream & frozen desserts at Rs 156 crore (Rs 164 crore).

Group exports had declined by five per cent to Rs 1,829 crore.

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