The Hindu Business Line : `HLL to sustain growth momentum'

, MARKET growth, its own initiatives at cost reduction and focus on market share helped Hindustan Lever Ltd (HLL) return to double-digit growth after a gap of six years in FY05. The company would continue to invest on brands and it's A&P (advertising and promotion) spend is unlikely to come down, Mr D. Sundaram, Director - Finance, HLL, said. "You need to drive market growth and give it sufficient amount of tail wind in your favour. A&P is what converts market growth to your growth," he told Business Line in an interview. Excerpts:

How do you put HLL's 2005 performance in perspective?

We have been seeing a sustained growth momentum over the last three to four quarters. We continued investing behind brands and that has helped. The markets have turned around for the last few quarters and rural markets have picked up. But margins have been under pressure though we have managed sensibly. We have taken price increases without sacrificing market shares. We have had good tax savings. Therefore, PAT is better than EBIT growth. . But the full year's EBIT growth was flat reflecting the pressure that we have faced in March quarter. Going ahead, the key challenge would be to keep a watch on the margins, sustain the growth momentum and continue to invest behind brands.

Raw material costs have gone up. Could you specify which inputs have become costly? And, what is the outlook in the medium term on their prices?

Most input costs had gone up in 2005. Prices of LAB (linear alkaline benzene), soda ash, caustic soda and polymers were on an upturn in 2005. Oils and fats prices were a little better. The fact that input prices have gone up with no corresponding neutralisation in product pricing indicates that margins are under pressure. You have to manage them through cost reduction initiatives and tax saving measures. At the same time we need money to invest behind A&P, so it is a dynamic situation.

In 2006, the prices seem stable. Petroleum prices are range bound. Some capacity increases have been effected in downstream units using these petroleum products. That has eased the pressure somewhat. But petroleum price movement would be the key thing for us to keep an eye on. We can sustain our prices until the $60-65 a barrel level. If prices go up beyond this level on a sustained basis then we have an issue. Freight cost has also moved up.

You mentioned about the return of growth in HLL's quarter numbers. At the same time, A&P spend is going up. How do you see this trend playing out against the backdrop of a return to growth?

The onset of growth in itself is not enough. You also need to drive market growth and give it sufficient amount of tail wind in your favour. A&P is what converts market growth to your growth. That is where brand investment comes in helping you to grab a larger share and expand the market. The biggest opportunity in India is to increase consumption and penetration of products. Ultimately, companies like HLL are driving for three things — penetration, consumption and upgradation. That somebody uses a product once in six months in a rural household indicates there is penetration of the product. Regular use of the product would drive consumption. The consumer who uses a product regularly may want to use it by brand. Therefore, your brand strength is very important because they associate the quality, sensorial benefits with the brand.Finally, upgradation is important. HLL is there in all the positions of this pyramid. Our success is when a consumer starts with Lifebuoy, moves to Lux and then moves to Pears or Dove. Therefore, A&P is very critical for us. Our A&P spend is unlikely to come down. But it may vary from one quarter to another for each of the categories. We first plan, make the product, make it available, only then advertise.

There is optimism about HLL after this double-digit growth. But at the same time you have got serious challenges in managing margins. Would it be one of the real challenges for 2006?

Managing our margins is a serious challenge. We will continue to manage margins with a host of measures without sacrificing our market position. But if we have to really gain market position... we will not hesitate to do that. Provided overall we can see real value creation in the longer term. I must continue to deliver EPS to the shareholder. And EPS can come through a whole host of things — topline, cost management and interest cost saving.

You also mentioned about the sustainability of the growth. How sustainable do you think it really is?

Our perspective is that markets have turned positive. So we must ride on that positiveness with the strength of distribution. We have the strength to carry on. We have a large base. When HLL talks of 10 per cent growth it is a big growth.