The 30 power brands of HLL grew by 6.5% compared to overall topline growth of 3.5% in CY01. This has led to 1.8% improvement in margins from 13.8% to 15.6% for the year. The company pursued its strategy of focusing on concentrating on power brands in the face of intense competition, depressed economy and declining markets. This strategy has accelerated the FMCG topline growth to 7% in the 2H01 compared to 3% in the 1H01.The power brands grew by 9% in the 2H02 due to the strong 12% growth of personal care products.

• Improved margins in food category

The food profitability has doubled which has led to the improvement in the overall margins. Several non-FMCG holdings were partially or fully divested and the same were reinvested into strengthening the Foods portfolio. The focus on food portfolio has led to the 8.5% improvement in beverages and 1% in food business. The flagship brand, Taj Mahal tea recorded a sales growth of 6% in the declining tea market. The Ustaad Zakir Hussain’s challenge on Taj Mahal reinforced the brand’s position as the best tea in India. Bru coffee had a strong growth of 15%. Overall, food sales were up by 14% with a 18% rise in oils and fats. Modern Foods grew impressively by 66%.

• Restructuring of businesses

The various restructuring measures have resulted in exceptional income of Rs. 100.0 Cr. during CY01. This includes profits of Rs. 143.0 Cr. on the divestment of quest and animal feeds business, Reduction in tax liability of Rs. 28.0 Cr. on amalgamation of IBL, provision of write-off Rs. 11.0 Cr. for thermometer business, profit of Rs. 17.0 Cr. for the disposal of nickel catalyst business, provision of write off of Rs. 19.0 Cr. on Culinary products, Provision of write off of Rs. 43.0 Cr. for Ice cream business and provision of additional liability of Rs. 63.0 cr. on employee retirement benefits.

• Bonus debentures

HLL will issue bonus debentures in the ratio of 1 bonus debenture of Rs. 6 each for every share of Rs.1 held in the company. These debentures will carry an interest of 9% per annum and will be redeemed equally on second and third anniversary of the issue. These debentures will be issued out of the reserves and will not affect the equity capital and the EPS.

• Ready to eat chapattis will give convenience

HLL has introduced ready to eat chapattis in CY2001 under the brand name Annapurna. These chapattis are to be heated for only 10 seconds and are priced at Rs. 1.50 per piece and are available in pack of five chapattis. The company has also launched an initiative on contract farming for wheat in Madhya Pradesh in association with Rallis and ICICI. We expect this product to get excellent support from the consumers due to the ease in its usage.

• Export of agro products will boost

HLL has been awarded golden super star trading house status. With the recent relaxation on export curbs, the company is poised to export agricultural products such as wheat, wheat products, coarse grains, butter, and non-basmati rice. This is likely to give boost to the export of commodities.

• Personal wash segment looking bright

HLL’s personal wash segment is looking up with several re-structuring measures. The personal care products had a strong growth in 2001 compared to the market. The power brands in this segment had even better growth than the segment. HLL has launched the active variant of lifebuoy and launched Fair & Lovely soap. The following table gives the details of growth rates:

The above table indicates that the power brands have helped the company to improve the bottomline in the most difficult times.

Net sales during the 4Q01 were up by 4.3% from Rs. 2648.10 Cr. to Rs. 2762.92 Cr. Total expenses were marginally up by 0.5% from Rs. 2175.23 Cr. to Rs. 2186.43 Cr. Material cost along with stock adjustment came down from 57.4% to 54.0% of sales. Personnel expenses were up from 3.7% to 5.3% of sales. Other expenses came down from 21.1% to 19.8% of sales. Operating margins improved by 300 basis points from 17.9% to 20.9%. EBIDTA margins were up by 250 basis points from 21.1% to 23.6%. Interest was lower by 55.4% from Rs. 4.35 Cr. to Rs. 1.94 Cr. depreciation went up by 14.3% from Rs. 34.48 Cr. to Rs. 39.41 Cr. profit before tax enhanced by 17.4% from Rs. 519.85 Cr. to Rs. 610.17 Cr. Tax provision was higher by 22.1% from Rs. 90.27 Cr. to Rs. 110.19 Cr.Net profit before extraordinary items was up by 16.4% from Rs. 429.58 Cr. to Rs. 499.98 Cr. Extraordinary items were Rs. 63.6 Cr. as compared to NIL in the previous period. Net profit was marginally up by 1.6% from Rs. 429.58 Cr. to Rs. 436.38 Cr.

The segment wise performance is shown in the following table:

Soaps and Detergents are the highest revenue and profit earners for the company followed by personal care products. The profitability of beverages has come down in the 4Q01.

The segment wise growth rates are shown in the table below:

Exports exhibited 22% growth rate during CY01 whereas the exports of FMCG grew at 8.0%.

The current market price of Rs. 223 discounts the CY01 earnings of Rs. 7.0 by 31.9X giving scope for capital appreciation in the long term.

We expect HLL to be MARKETPERFORMER due to its focus on 30 power brands, which will lead to strong future growth. The restructuring initiatives are likely to improve the bottom line of the company. The recent relaxation in export curbs will enhance export of agricultural commodities. The rural demand is likely to pick up due to good monsoon.

*Face value Rs. 1/-

HLL has the highest sales among its peers. The company has the highest EPS compared to its peers. HLL has higher market cap/ sales ratio than its peers. The company ranks better than Cadbury India (CIL) on the P/E front. Taking the overall view HLL ranks better than CIL. Those opting for buyback of CIL could switch to HLL.

Current Market Price Rs. 223

13 day EMA Rs. 219

50 day EMA Rs. 217

200 day EMA Rs. 212

Support Rs. 217

Resistance Rs. 233 & 240

The scrip currently trades above all its EMA levels. The scrip has support at Rs. 217 and has resistance at Rs. 233 & 240. Once it crosses the Rs. 240 level it will enter in a bull phase.

Long-term investors should hold, buy on a reaction. It would be a market performer from current levels and our recommendation could be upgraded after its Q1 results of FY 02.