The Hindu Business Line : HLL looks at `long term'; unfazed by Q2 nos

At HLL's briefing on June quarter performance peppered with its resolve to "not yield an inch to competition," questions on the marketing war with Procter & Gamble (P&G) fetched a characteristic, "We will see. Let them come."

Despite what is now a few years of gloom surrounding the company's performance, the Chairman, Mr M.S. Banga, continued to be convincing in his portrayal of HLL's predicament and defence. Key words for the season are "long term".

According to him, even a six per cent growth in GDP should see India matching China's current GDP in 10 years. That should translate into double-digit growth rates for several FMCG categories. Yet the Indian story has been different so far.

HLL argues that one of the factors contributing to the churn in FMCG, including cases of category de-growth, was the decline in interest rates.

As it fell from 18 per cent to seven per cent, consumer loans availed for purchasing several sought after items arguably muscled out the space traditionally reserved for FMCG items.

The stance may appear a shade too hard to digest given the staple nature of most FMCG purchases, but as Mr D. Sundaram, Director (Finance), pointed out, the erosion of wallet space for FMCG must be seen at the macro level.

This is a pattern seen in growing economies, how long it would last being a guess officials don't wish to hazard.

"The market has taken time to adjust and that is what has happened over the last three to five years," Mr Banga said. In the interim, HLL has consolidated and strengthened its brands.

If growth is a composite of internal and external factors, HLL believes it has much of the internal pre-requisites in place. Its take on the June quarter therefore is that a quarter does not spell a year or for that matter, the long term.

"The FMCG market is now beginning to strengthen. I honestly believe the kind of category de-growth we saw earlier won't be there in the future. The sector itself should look forward to strong growth in the next five to ten years. It is for that reason that we are investing to protect potential brands," he said.

The company's advertising and promotion expense was up almost Rs 60 crore in the quarter impacting EBIT.

Said Mr Sundaram, "A shareholder would only ask whether the company is taking the right value creation steps for the longer term, is it protecting that longer term? If the company was protecting the shorter term, I need not have spent that Rs 60 crore extra. The fact that we spent is because we are building towards that longer term, we are investing to meet the challenges head on, some initiated by ourselves, some being uneconomic actions thrust on us to which we have to respond."

"The strength is that the company has got the portfolio of products, brands and pockets so that at day's end even after all these expenses you have an attractive profit of Rs 330 crore. If there is ammunition in stock that I have, what am I supposed to do? Look at the ammunition or fire?" he asked.

HLL, he says, has delivered on profitability, been a good cash and value generating company. "Our economic value added continued to grow. That it was not reflected in the market price might be due to a combination of factors. The major one being - why we are not playing to our full potential on the topline?"

"But we had a consolidation strategy for the last few years. Some of the topline shrank because we disposed many businesses that did not fit in. We have not filled it back with organic growth or acquisitions," he said. Strategy then on was to deliver value through relevant brand/brand innovations, investment in quality and appropriate pricing, besides cost savings.

"That strategy stands. I would say, the June quarter clearly demonstrates that my strategy is on course, I have an unblinking response, am spending money for the long term, have initiated cost savings," Mr Sundaram said. Critical thing being that for the first three years HLL had a stated strategy, having done which it is moving forward to value creation.

"You can ask why didn't you do it in the June quarter? That's because, as much as people would like it, we can't deliver it on that basis as many of these things take time. We have to allow that time," he said.

If Mr Banga is to be believed, first comes volume growth, then value, followed by profits.

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