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Aarati Krishnan

As a key index constituent, the Hindustan Lever stock has been battered by profit taking as apprehensions of war gathered steam over the past week. The stock is now trading at Rs 185, having fallen a third from a high of Rs 262 reached in March 2002. The stock is now trading at a price-earnings multiple of around 26 times its 2001 earnings. Given the low valuation levels (relative to what the stock has commanded in the recent past) and the defensive nature of the stock, investors can consider building exposures in the stock, for reasonable appreciation in capital over a two to three-year period. Should war fears escalate, there could be a further downside in market levels. Investors could use any decline in the Hindustan Lever stock price in line with the broad markets to Rs 170-175 levels, to take exposures in the stock.

With the market for FMCGs in a sluggish mode, HLL's recent financial performance has been quite sedate. While cost cutting and streamlining of the supply chain has helped keep up double-digit profit growth, sales growth has proved quite elusive for HLL. For the quarter ended March 2002, HLL reported a 16.3 per cent profit growth, even as its topline shrunk by 10 per cent. Traditional cash cows such as personal products, soaps and detergents have been the key drivers of HLL's growth in the past year. With growth rates in these markets flagging, HLL has found it difficult to muster higher rates of sales growth.

Over the long term, HLL's new strategic initiatives such as a renewed focus on 30 "power" brands, aggressive promotional activity and a foray into new businesses such as packaged foods and confectionery have the potential to pay off. Any sustained improvement in rural disposable incomes (if this monsoon turns out to be satisfactory as forecasted), could also provide the much-needed kicker to earnings over a three-year time frame.

There are a few factors that could pan out in HLL's favour over the next couple of quarters. The decision in March 2002 to hike selling prices on some key brands could pep up sales growth in the current quarter. HLL's decision to reduce selling prices on the range of cosmetic products after the cut in excise duty in the recent budget, could also pep up offtake in this high margin segment.

Despite the slowdown in its key businesses, the company remains a desirable defensive investment candidate in times of uncertainty. Professional management, a solid portfolio of brands, and a consistent track record of profitability add to the stock's attractiveness in the current scenario.

Given that the stock offers potential for moderate, rather than high, capital appreciation, investors in the stock should watch for any sharp spike in stock price to lock into returns, and re-enter at lower levels.

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