The Hindu Business Line : Better growth, but not without trouble spots

Chennai April 30 After closing 2006 with a disappointing show in the final quarter, Hindustan Lever has reported improved earnings numbers in the first quarter of 2007, with strong topline growth and a higher pace of profit growth.

But despite the improvement in growth rates, the numbers fail to alleviate the areas of concern - sluggish growth in the key personal products business and margin pressures from rising material costs.

HLL's sales and net profits (before exceptional items) grew by 14.6 per cent and 13.9 per cent, respectively in the March quarter, against 6.9 per cent and 10.2 per cent, respectively in the December 2006 quarter.

The sales growth has remained fairly broad-based. The home and personal care business (growth of 10 per cent) and foods (23 per cent) put up a much stronger show than they did in the preceding quarter, while exports revived strongly (27 per cent). The foods business gained considerable traction, piggybacking on new launches in this category during this period.

However, one trouble spot in the sales numbers was the continuing sluggishness in the personal care business (growth of 7.5 per cent), which HLL attributed to a high "base effect" the previous quarter. The company also witnessed some slippage in its operating profit margins, as price increases on soap and skin care brands only partially offset higher material costs and stepped up spends on advertising.

One aspect of HLL's strategy that bears watching is its recent attempts at improving its product mix. The majority of product launches that the company has made in the recent months (egs: Dove body wash, Pond's Age Miracle) have been of premium brands catering to the urban consumer.

Yet competitors such as Colgate Palmolive and Godrej Consumer have been reporting higher growth rates for their mass market and mid-priced brands than for their premium brands in recent quarters, helping them gain market share in some segments.

It remains to be seen as to whether HLL now reorients its strategy to protect its turf in the low-priced and mid segments of the toothpaste and personal care markets, or persists with its focus on premium brands.

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