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Aarati Krishnan

IS Hindustan Lever's 7 per cent sales growth in the March quarter simply a flash in the pan? Or is it an early sign that the company is climbing out of the grip of slow growth in which it has been stuck for about three years now?

Not an easy call, apparently, even for the investment analysts who track the Levers stock. Going by Bloomberg news service, analyst opinions on HLL are divided down the middle. Seven of the 14 analysts who track the stock rate it as a "sell"; but an equal number have either a "hold" or a "buy" rating on the stock.

Investors looking for exciting new products or businesses that could quickly boost HLL's growth numbers, would not find too many in its portfolio. Very few of its new business forays in the recent years have hit paydirt. Businesses such as ice creams, branded staples and processed foods, which were to be the growth engines of the future, have not grown much in size over the past few years. Write-offs on Modern Foods and a recent withdrawal from the confectionery business signal that these have not delivered on their growth targets either. HLL has also been rather choosy about pursuing large volume-driven business opportunities such as branded staples and confectionery, because it tends to focus too much on profit margins.

But it is HLL's conventional bread and butter businesses such as soaps, detergents and personal products that now seem to offer hope for growth. Over the past five quarters, there has been clear evidence of reviving growth in the FMCG market as a whole. Market growth for FMCGs has crept up from a negative 2.8 per cent in the last quarter of 2004 to a positive 6 per cent in the March 2005 quarter. The growth has been led mainly by expanding urban spends with marginal contribution from the rural market.

There is new hope for the long term too. There is already a rapid expansion in the employment opportunities in urban India, improving levels of disposable income and a visible increase in consumer spends. This lends credence to predictions that the country is in the initial stages of a demographic shift that will swell the number of the affluent urban consumers within the next few years.

With urban incomes expanding sharply and FMCG purchases set to occupy a lower proportion of the spends, there is the possibility that consumers will turn less price-sensitive about their basic purchases, than they have been so far. This could help ease some of the pricing pressures on key FMCG categories, allowing players to peg up their selling prices after a three-year gap. Recent price increases by HLL in detergents and toothpastes are evidence of this trend.

But even assuming that FMCGs are entering a new growth wave, will HLL get to capitalise on it? The answer seems to be yes.

Despite some loss of market share in businesses such as toothpastes and shampoos in the recent years, HLL continues to be the dominant force in several of the FMCG categories in which it operates. Its market shares in 11 key FMCG categories where it is present range from 30 to 69 per cent. It continues to be the market leader in eight of these. Its products straddle a wide swathe of price points and geographical segments, replicated by few other players. This suggests that any broadbased recovery in demand across FMCGs will surely turn out to be the wind in HLL's sails.

The company's brand portfolio is in good shape, after two years spent in relaunching, redesigning and reformulating its key brands.

These initiatives have helped tackle the brand fatigue that had crept in with HLL's market-leading brands that are years old in their category. Investors have had a long wait, but these trends suggest that the company's fortunes could be looking up for good.

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