The Hindu Business Line : Price wars tell on Hind Lever

HINDUSTAN Lever's numbers for the September quarter show that the company continues to aggressively target sales volumes and market share, at the expense of its immediate profitability. The jury is still out on whether this strategy will deliver a sustainable boost to its flagging sales.

The company's net profits (excluding exceptional income, on continuing businesses) for the quarter plunged by 30.6 per cent. Dwindling returns on the company's prodigious cash chest and higher ad spend aggravated the fall in profits, already expected after the steep price cuts in detergents and shampoos in March this year.

The soaps and detergents business was back to a 3.8 per cent value growth, after shrinking in the first six months of 2004, with the company claiming gains in both volume and value market share for washing powders since March. This alleviates fears of HLL's market shares receiving a big knock as a result of the price wars with P&G. But for the recent price cuts to be vindicated, value growth will have to be sustained over the next few quarters. HLL has initiated a complete makeover of its soaps business in recent months, which if successful, could boost profit margins.

In contrast, it is still early to gauge HLL's wins in the ongoing shampoo wars. HLL has been quite aggressive in this segment, offering additional free volumes on its sachet packs, taking further price cuts on bottles and intensively promoting its low unit packs. These strategies again involve significant sacrifices on price. Despite the pressures on profitability, HLL has continued to pump up its ad spend this quarter, rolling out high decibel campaigns for cosmetics, shampoos and soaps.

The beverages business has rebounded with a strong growth in profits this quarter. The foods business has continued to shrink as HLL focused its energies on warding off competitors in its home and personal care portfolio. Foods now makes a minuscule contribution both to revenues and profits.

Given the base effect of the price cuts, a declining trend in HLL's profits appears set to continue until next March. One positive factor for shareholders would be the scheduled redemption of HLL's bonus debentures in December this year. This could reduce HLL's annual interest outgo by Rs120 crore and may deliver a boost to its 2005 profits. The redemption would also ensure that HLL returns cash to its shareholders instead of retaining it in its treasury, at a time when the scope for trading gains from active management, has been severely restricted by the rising interest rates.

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