The Hindu Business Line : HLL: On comeback trail?

FMCG major Hindustan Lever claims that the days of slow growth are behind it. A new Chairman at the helm, a revamped portfolio of brands and a positive outlook for consumer goods it expects will give it the right boost. A Catalyst report.

BRINGING FMCG Back to Growth,' screamed the title of the AGM speech by Hindustan Lever's outgoing Chairman, M.S. Banga, which featured in several mainline dailies recently. Although his parting speech emphasisedthat the difficultdays of slow growth were finally behind the company, analysts are still divided on whether this heralds the beginning of good times for the FMCG behemoth.

"We in the new HLL see an exciting opportunity for growth. We have 35 powerful brands covering all segments with leading market positions in most. Today, these are stronger and more relevant to the consumer than ever. Our people are energised by the scale of the opportunity and determined to seize it. The scale of our business and operations gives us the resources we need. We are very confident of delivering sustainable profitable growth," said Banga in his speech, spelling hope for his shareholders.

The past few quarters have been difficult for the company with net profits dipping consistently. While the company has tried its best, from revamping its management structure to slashing prices, its new Chairman, Harish Manwani, now has the onus of putting the company back on track. Sounding optimistic, Manwani told the media: "The company's growth will be category-led. The space we are going to play in will not be defined by brand, but by category."

But industry observers are not so sure about his claims. Says Nikhil Vora, Vice-President (Research), SSKI Securities, "There is initial euphoria surrounding Levers right now, but it is still early days to predict its comeback. There is no need to go overboard about its growth claims. It can possibly make a comeback with a 6-7 per cent topline growth, which is good, but it would still lag behind industry growth rates. Even if its stock price has moved up, it has still under-performed in its sector."

Besides, high attrition rates have been plaguing the company. Some of its key managers have left. Category heads such as Mukul Deoras left for HLL's competitor, Colgate, last year while recently its ice creams' division head, J.H. Mehta, joined RPG's retail business. Also, over the past several months, other senior to mid-level managers have been exiting, the latest being Siddharth Singh, marketing manager for its detergent business, who quit to join Nokia, like his predecessor, Sanjay Behl. Earlier too, the Head of its haircare business, D. Shivakumar, quit to join Philips, while Prasad Narasimhan, Marketing Manager in the home and personal care unit, moved to TVS Motor. And, recently, Neeraj Chandra, Regional Brand Director, also quit to join Britannia.

Claims an analyst from a prominent stockbroking firm: "Levers can temporarily make profits for the next few quarters. Growing from a de-growth phase is no big deal. But the company will continue to face the heat both internally as well as externally from competition." Adds a former senior employee of HLL, "Its profit base has become so small that it will be difficult for it to make a comeback. At least in absolute numbers it can never match its heyday." But the price cuts seem to have done the company a world of good. Analysts tracking the company feel that its comeback has been primarily due to the price reductions it made last year. Says Atul Rastogi, analyst at Motilal Oswal Securities, "The full effect of the price cuts is now visible and its performance is going to be better than last year." Agrees another analyst at ICICI Securities, "Due to its aggressive pricing growth will be back."

Ironically, it was HLL's competitor P&G which showed it the way to adopt the `right' pricing for the detergent category early last year by dropping prices. Analysyt Yasmin R. Shah at Anand Rathi Securities says: "HLL was commanding a steep premium to its nearest competitor. Its products were not priced rightly and it was late in taking a decision to cut prices. Now its growth is expected to be propelled by the price cuts."

Responding to competitive pressures, HLL was forced to follow suit and thereby helped both itself and P&G in gaining the much-needed volumes. Its volume increases were at the cost of the smaller detergent brands, according to industry observers.

Nitin Paranjpe, Vice-President (Laundry & Household Cleaners), in an earlier interview to Catalyst had said, "Most of the price decreases were not led by us. Pricing is something you have to change in the context of what the market needs. A business environment was created last year when prices of many products were slashed. We were clear that we would respond in a manner which was appropriate so that we do not lose our competitiveness in the market."

Thereafter, there was some amount of price revision, especially when input costs spiralled this year but consumers absorbed these slight price increases and nobody complained.

But whether the price slashes undertaken last year will help in reaping double-digit growth figures remains to be seen.

Estimating meagre growth rate figures for the company, Ranjit Kapadia, Senior Analyst, Equity, Tower Capital & Securities Private Ltd, says, "It is possible to get growth rates between 7 and 8 per cent but certainly not in double digits. This would be primarily due to the fact that prices have stabilised and coupled with a good monsoon, might help the company in springing back."

Price cuts apart, the FMCG major has not exactly been resting on its laurels when it came to rejuvenating its brands to attract consumers. Re-launching some mega brands such as Close Up, Liril and Rin and unleashing new variants of its power brands remained an ongoing exercise. For instance, recently it launched a `clear skin' variant for its largest selling soap brand, Lifebuoy, while Pepsodent introduced a whitening variant with the reportedly unique ingredient Pearlite. Its recent re-launches comprised Liril getting a new lease of life on the aloe vera platform while Rin became Rin Advanced with a superior formulation for whitening. Its mega skincare brand of Fair & Lovely was extended to a more premium platform under a new sub-brand of Perfect Radiance.

Differentiating its brands in the competitive environment has been top of its agenda. . For instance, recently it positioned Surf Excel on the proposition that it helped save two buckets of water with its formulation, especially in water-deficient cities. Banga in his AGM speech also highlighted this effort. Said he, "Surf Excel went beyond the benefit of great clean by saving two buckets of water with every wash. Imagine the importance of that benefit to consumers who often get running water for only a couple of hours. Surf Excel is one of our fastest growing brands today."

But 2004 has been a difficult year for HLL. At the company's recent AGM, Banga explained to shareholders that the decline in profitability was due to the cost incurred for protecting HLL's market share. "I would like you to see last year's profit dip as protecting our market share, which in turn is an investment to protect future market share," he said. The home and personal care (HPC) business faced a challenging 2004. According to the company's annual report, its sales grew by 2.2 per cent, which was below expectations but broadly in line with the HPC market growth of 2.5 per cent. In the soaps and detergents segment, the company grew its topline by 2.1 per cent but declined in segment profits by 28.8 per cent over 2003. Segment margins too dropped from 24.8 per cent in 2003 to 17.3 per cent in 2004. In the personal products segment the company grew its topline by 2.6 per cent but declined in segment profits by 8.7 per cent. Segment margins dropped from 36.7 per cent in 2003 to 32.7 per cent in 2004. The company gained shares in skincare and recorded small gains in its toothpaste brands but lost in shampoos and talcum powders.

Meanwhile, HLL's most challenging category — foods — is expected to get an added thrust with a new supply chain back-up for reducing cost. Banga in his AGM speech did acknowledge the challenges his company faced in the foods business. "Historically, our foods business was fragmented and lacked scale. It was often commoditised with low margins. We recognised that changing food habits would require considerable investment, which the current business simply could not afford. Therefore we divested the non-value added parts, like vanaspati. We have consolidated our portfolio and improved the gross margins by over 13 per cent through product mix and cost reduction. Today, our foods business has a healthy gross margin and a supply-chain driven by freshness."

Entering new businesses, especially in the area of services with its Ayush therapy centres and water purifiers through its Pureit brand, shows the company's appetite for taking risks. Besides, its Project Shakti to give rural women a sustainable source of income, other projects such as Sangam Direct (dial-in service for groceries in Mumbai) and its direct selling initiative under HLN (Hindustan Lever Network) are ways of hedging its risks in times of uncertainty.

But analysts are not too impressed with the company's efforts. "HLL has always been obsessed with margins and does not have the ability to take big risks. Its ability to invest and even stay invested has not been strong," claims an analyst from a stockbroking firm.

Reacting to the positive news emanating from the company, the HLL stock has been moving up steadily on the bourses. On the second day following its AGM its share price closed at Rs 162.45 when almost a year ago the stock was being quoted at Rs 128. Again analysts are not too upbeat about the sudden rise in its scrip price. Says Motilal Oswal Securities' Rastogi, "There has been an overall improvement but I would still give a `neutral' status to the stock."

But there is no looking back as far as this FMCG giant is concerned. Describing the position of his company at the recent AGM, Banga says, "When you run up a hill fast, you tend to slow down a bit. We have been re-equipping ourselves for the steeper slope that you see in the market today. Let me assure you, we have no intention of slipping down that hill. We have begun the climb back."

That shouldn't be too big a feat for the Rs 9,926.95-crore FMCG behemoth that is claiming to be on the comeback trail.

Imaging: Balakrishnan K

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