Financial Daily from THE HINDU group of publications
Friday, Apr 30, 2004
Financial Daily from THE HINDU group of publications Friday, Apr 30, 2004 |
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Corporate
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Performance Columns - Microscope Hindustan Lever — Under pressure on several fronts Aarati Krishnan
FEW will be surprised that Hindustan Lever's net profits have declined for the quarter ended March 2004. Profitability was widely expected to be squeezed, after the high-profile price wars unleashed this quarter saw the company slashing the price tags of its premium detergent and shampoo brands by 15-20 per cent. With competitors raising the stakes and volume growth sluggish, price cuts appeared to be the only way to expand the size of these categories over the long term. But the magnitude of the drop in profits is certainly a surprise; and disturbingly, owes a relatively small part to recent price cuts on detergents and shampoos. HLL's profits (before interest and tax) for the quarter have slumped by 13.7 per cent to Rs 358.9 crore, a total shrinkage of Rs 57.1 crore. HLL's segment-wise results reveal that home and personal care (HPC) — the categories where price cuts were concentrated this quarter — accounted for no more than Rs.8.3 crore of this decline. In fact, the HPC business fared reasonably well over the quarter, managing to grow sales value by 3.5 per cent and volume by 7 per cent, while profits slipped marginally by 2.2 per cent. But this quarter may not accurately capture the impact of the price wars on HLL as the price cuts on detergents and shampoos were unleashed only at the fag end of the period, in March 2004. The more disturbing aspect of HLL's numbers is that many of its non-HPC businesses have suffered a deterioration in profits during the quarter. Businesses such as beverages, foods, ice creams and exports reported a total shrinkage of Rs 38.6 crore in profits before interest and taxes for quarter, contributing substantially to the dent in HLL's bottomline. Whether this is reflection of enhanced competitive activity in these businesses or additional marketing investments by HLL to defend its market shares, is not clear. In either case, it indicates that the company is under pressure on several fronts, other than just in its traditional HPC businesses. But competitive pressures apart, non-operational items such a fall in treasury income and the interest obligation on bonus debentures have also had a big hand in the sharp drop in HLL's profits for the quarter. This may not be reflection on HLL's operations. But with the decline in interest rates, as well as the interest obligation on bonus debentures, set to recur, these two numbers could continue to weigh on HLL's numbers for some time to come.
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