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Latha Venkatraman

Analysts were of the opinion that HPC products operate in a largely saturated market barring shampoos and skin creams.

Mumbai , Aug. 18

CONSUMER goods company Hindustan Lever Ltd may have returned to profit growth during the second quarter of 2005, but its journey through the coming quarters is not expected to be without hitches, analysts say.

In terms of percentage growth, its home and personal care (HPC) segment grew by 12 per cent across categories, and the foods segment by 10 per cent during the second quarter of 2005. But worries about the foods segment's ability to sustain growth remain.

HLL's foods segment outside of its beverages category is minuscule and does not promise possibilities, equity analysts feel. Therefore, an absence of a strong growth story in the foods division of HLL could scuttle its overall profitability progress.

While beverages and ice cream grew, processed foods declined. Within the processed foods category squashes and salt sales growth was negated by fall in atta and ketchup.

"There is apparently no strong growth engine within the processed foods category. Even though a couple of products may do well, the overall market itself is very small," said an analyst.

During the second quarter of 2005, HPC accounted for Rs 2,018.92 crore of HLL's net sales of 2,836.32 crore, while foods accounted for 427.82 crore.

Earlier, HLL had announced that it would de-focus on Annapurna atta in unviable geographies where gross margins are not very attractive. But atta continues to show declines through the second quarter.

However, HLL believes that the foods market is hugely underdeveloped in India and therefore the potential is immense. "The advent of modern trade provides a huge impetus to foods business," Mr S. Ravindranath, Managing Director - Foods, HLL, had said at the analyst meet for second quarter performance.

While HPC showed all round growth driven by shampoo and laundry during the second quarter, analysts were of the opinion that its HPC products operate in a largely saturated market barring shampoos and skin creams.

HLL's improved performance was also rooted in the fact that the overall FMCG market has been on an upturn, helping companies to push in moderate price increases on some of the products. The company believes that the revival in the FMCG sector is urban-led, while the rural markets have reversed their downturn.

However, the biggest worry facing the company is cost escalations spurred by rising crude oil prices. Even as cost escalations are expected to impact some of the categories, HLL's cost base is hugely competitive, the company officials said.

Opinion about HLL in terms of its stock performance has been divided among brokerages; while some have recommended a buy, others maintain the underperformer status on it.

In the last month, shares of HLL have risen by eight per cent to Rs 172.75 on the Bombay Stock Exchange.

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