The Hindu Business Line : HLL's windy days

HE inherited a dominant and nippy outfit when he took over as Chairman of Hindustan Lever on May 1, 2000. Precisely four years down the line, Mr M.S. Banga leaves behind a company that is at the crossroads.

In the four years leading up to the year 2000, HLL's sales had expanded by 31 per cent annually, while its profits zoomed by 45 per cent every year. But the succeeding years have proved to be quite an anti-climax. Between 2000 and 2003, HLL's net sales actually shrank, while profits grew at a sober 14 per cent a year.

Weeding out phase

But then, a straight comparison of this sort is more than a little misleading. For, HLL's breathtaking growth rates in the late nineties owed a lot to the rapidity with which it lapped up its competitors and consolidated group companies. Between 1996 and 2000, a steady stream of big-ticket acquisitions and mergers (of Brooke Bond, Pond's, Lakme Lever and Bestfoods), helped HLL add size, scale and market share at a rapid pace.

In contrast, over the past three years, HLL has been in the weeding-out phase. Its net sales shrunk by 4.5 per cent between 2000 and 2003. But much of this shrinkage is explained by the divestiture of low-margin and loss-making businesses, for a better focus on the FMCG business. Between 2000 and 2003, HLL has divested 8 businesses, including such big ones as oils and fats, chemicals and animal feeds.

This has helped; and HLL is today more keenly focused and manages a healthier portfolio of brands than it did in 2000. FMCG sales today account for 93 per cent of revenues, as compared to 85 per cent in 2000. HLL's portfolio is now made up of a manageable 35 brands, rather than an unwieldy 110. The divestiture of loss-making businesses and cost savings from supply chain initiatives, have helped peg up HLL's operating profit margins from 14.8 per cent in 2000 to 19.5 per cent in 2003; a sizeable improvement by any yardstick.

Rising competition

But there is no doubt that HLL is now entering a particularly challenging phase. First, nimble competitors have steadily nibbled away at its market shares, breaking its stranglehold over key categories such as toothpastes, shampoos and cosmetics. Second, sluggish markets have forced HLL, and other dominant players in the FMCG market, to slash prices, in order to expand volume growth. With its pricing power significantly eroded, HLL no longer has the luxury of pegging up selling prices at regular intervals, as it did in the early nineties, to make up for a slow down in offtake of its products.

The slow progress made by HLL's new ventures, through which it was hoping to add significantly to its size and scale, is also a big area of concern. When Mr Banga took the helm, he had spelled out confectionery, e-tailing, water and healthcare as the growth areas of the future. He had also predicted an "incubation phase" of 3-4 years for these businesses, after which they would be expected to take-off.

But HLL's dependence on its traditional bread-and-butter businesses has actually risen over the past three years. The conventional home and personal care businesses contributed 66 per cent of sales in 2003, having crept up from 58 per cent in 1999. It may be several years before "sunrise" businesses initiated by Mr Banga such as foods, confectionery and healthcare make a significant difference to HLL's financial picture. And that would be the time to judge Mr Banga's contribution to HLL.

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