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December 13, 2001 Management Excellence INTRODUCTION Hindustan Lever (HLL) has exhibited a good performance in the 3Q01 with a 7% rise in sales and 14% rise in net profits in the scenario of a subdued market and slow down of the economy. HLL has plans to launch Lipton ice tea and full range of Dove products. The company has plans to issue bonus debentures to its shareholders. The thrust on 30 power brands is likely to improve the profitability of the company. More in the report.** Inside The Report ** FinancialsHLL has introduced two new products during the quarter - namely Lipton Ice Tea and the full range of Dove products. Unilever has successfully developed cold tea as a business globally. HLL’s mission in India is to paint the country yellow with the brand. Dove is among the fastest growing Unilever brands worldwide, growing 30% annually and is expected to reach $ 2 billion mark by 2002. The Dove range includes beauty bars, face care, body wash, hair care and deodorants. The company has already launched Lakme beauty saloons and laundry services, which are likely to do well.
The parent company Unilever has plans to trim its product portfolio from 1200 to 400 brands. These 400 brands currently account for 90% of Unilever’s sales and plan to increase the sales to 95% for these brands by 2004. In line with this, HLL has planned to reduce its portfolio and will concentrate on 30 power brands. HLL contributes around 5% to the Unilever’s global sales.
HLL has set up two new factories for the manufacture of detergents and beverages at Silvassa. The detergent plant will have an investment of Rs. 45.0 Cr. and has an installed capacity of 1,80,000 TPA of bars and concentrated powders. The company will manufacture Surf, Excel, Rin and Vim at this plant. The Tea factory will carry out blending and packaging of 15,000 TPA of tea. This plant has an investment of Rs. 15.0 Cr. and will produce Taj Mahal, Red label and Taaza brands of tea.
The consortium of HLL, Unilever Overseas holding BV and Lipton India Exports currently hold 89.62% stake in Rossell Industries (RIL). The consortium has made an open offer for the remaining 10.38% stake at Rs. 120 per share to the existing shareholders. The shares of RIL will be de-listed when the shareholding of the consortium exceeds 90%. RIL can be merged with HLL thereafter.
HLL has plans to issue bonus debentures to its shareholders in lieu of bonus shares. This is the first of its kind event in the Indian corporate history. The shareholders of HLL will receive one debenture of face value of Rs. 6 per each share. These debentures will be issued from the general reserves of the company and will carry an interest rate of 9%. The debentures will have three- year term and will be redeemed in two equal installments in the second and third anniversary of the day of the issue. The company also plans to list these debentures thus providing the investors with liquidity. The company has cleverly deployed the excess cash in the balance sheet to issue the debenture bonus shares without increasing the equity capital. F inancials
HLL has reported 7% rise in sales for the 3Q01 from Rs. 2461.90 Cr. to Rs. 2635.22 Cr. Total expenses have come down from 85.6% to 84.6% of sales indicating 100 basis point reduction. The material cost along with stock adjustment came down from 59.6% to 57.7% of sales, with 190 basis point reduction. Personnel expenses were down from 7.4% to 5.8% of sales. Other expenses went up by 250 basis points from 18.6% to 21.1%. The operating margin improved from 14.4% to 15.4%. Other income was up by 23.4% from Rs.91.87 Cr. to Rs. 113.36 Cr. EBIDTA margin improved from 18.2% to 19.7%. There was a 20.9% reduction in interest from Rs. 3.21 Cr. to Rs. 2.54 Cr. Depreciation was up by 31.3% from Rs. 29.9 Cr. to Rs. 39.27 Cr. Profit before tax was higher by 15.4% from Rs. 414.46 Cr. to Rs. 478.36 Cr. Tax provision was up by 20.9% from Rs. 83.31 Cr. to Rs. 100.71 Cr. Net profit before extraordinary items moved up by 14.0% from Rs. 331.15 Cr. to Rs. 399.16 Cr. There was an extraordinary income of Rs. 21.51 Cr comprising of the reduction in the tax liability from the amalgamation of International Bestfoods Limited (Rs. 28.61 Cr.) and the estimated costs for the closure of the thermometer business (Rs. 7.16 Cr.). Net profit after extraordinary expenses was up by 20.5% from Rs. 331.15 Cr. to Rs. 399.16 Cr. SEGMENT GROWTH RATES
The segment wise growth rate indicates that the total sales during the quarter were up by 7.0%. The domestic FMCG sector grew by 10.5% whereas home and personal care improved by 13.7%. Food products had a lower growth rate of 2.6%. The overall exports had de-growth of 7.8% whereas the export of FMCG products was up by 8.0%. Shampoo had the highest growth of 24.0% followed by personal care products, which grew by 13.7%. Fabric wash products had a 10.0% growth rate during the quarter. Ice cream, dental care and Beverages had de-growth of 7.0%, 4.0% and 3.6% respectively. SEGMENTWISE PERFORMANCE
As shown in the table above, the segment wise performance indicates that soaps & detergents are the major revenue earners to the extent of 40.5% and has generated 58.7% profits before interest and taxation (PBIT). This is followed by personal care products which have contributed 18.9% to the sales and 31.5% PBIT. Foods and ice cream are the loss making businesses. aluationsThe current market price of Rs. 215 discounts the CY00 EPS of Rs.6.0 by 35.8X. HLL commands a premium as compared to other FMCG stocks. With the picking up of the economy during the last two months, the demand for the company’s products is likely to improve substantially. The combination of copious rainfall and good cash crops is likely to have favourable impact on the FMCG industry. HLL is likely to perform well in the coming quarters with the company’s thrust on 30 power brands and introduction of new products. The sale of non-core business will generate additional income. RELATIVE VALUATION
HLL has the highest sales among its peers. The company has the highest market cap/sales ratio as compared to the other FMCG companies. HLL has lower P/E than Nestle India (NIL). TECHNICALS Current market value Rs. 215 13 days EMA Rs. 214 50 days EMA Rs. 214 200 days EMA Rs. 211 HLL shares are currently priced above all its EMA levels and are in the overbought zone. The scrip is currently in the bullish zone and is likely to rise in the near future. The scrip has support at Rs. 209 and resistance at Rs. 221.
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