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HLL's turnaround not round the corner, say analysts

NetScribes/Rajiv Banerjee

Going by the unimpressive results posted by FMCG major Hindustan Lever Ltd for the first quarter of calendar 2001, analysts have given thumbs down signal on the stock. The overall opinion is that HLL's turnaround story is yet sometime away and till then, the company will keep posting flat growth as it gets sandwiched between a slowdown in consumer spending and increased competition.

Brokerage firm Dalal & Broacha Stock Broking Pvt Ltd has already recommended a sell at higher levels, while Motilal Oswal Securities and SG Asia Securities have recommended a hold on the scrip.

On the Bombay Stock Exchange, the scrip closed at Rs 215.15 on Tuesday, down Rs 4.55 from the previous close of Rs 219.70. A total of 9,64,989 shares were traded at the counter. The stock started it downward journey as investors started booking profits on the news of lacklustre results.

For the quarter ended March 31, 2001, the company posted a net profit of Rs 3,395.30 million, a 29.29 per cent year-on-year growth as compared to Rs 2,626.10 million for the quarter ended March 31, 2000. Net sales have shown a marginal growth of 1.09 per cent from Rs 26140.70 million in March 2000 to Rs 26,425.10 million for the first quarter 2001.

"The results show absolute flat growth in top line as the company struggles to counter a sluggish market and increasing competition. The outlook for the coming quarter is poor as we expect HLL to continue to post flat results," said Shalini Gupta, analyst at Motilal Oswal Securities.

Milind Muchhala, analyst at Dalal & Broacha, recommends investors to sell at a higher level. "It is better to exit at a higher level as fundamental outlook for the company looks weak," said Muchhala. "The net profits has been buffeted by rise in other income and dip in interest costs. Also the operating margins have shown an increase due to brand rationalisation and also control on costs," he added.

Analysts said that HLL's fortunes are also dependent on the impending monsoon, which if good could fuel a spurt in rural demand. The urban consumption trends, according to analysts, have seen a decline as spending has come down due to a deceleration in the economy. Apart from that, HLL's competitors have been snapping at its heels eating into the company's market share in various categories.

"The volume growth has seen a slowdown as the company is facing competition on all categories which has been reflected in the results this quarter. In oral care, Colgate has been giving severe competition. In tea, HLL has been battling competition from Tata Tea; while the personal care has seen Godrej Soaps and Procter & Gamble eat into HLL's market share," said Gaurav Narain, analyst at SG Asia Securities.

The expected turnaround due to revamping in the portfolio is seen by analysts as a distant reality. HLL has indicated that it will be phasing out certain brands from its portfolio to concentrate on brands, which are doing well in the market. Brands such as Jai soap, Captain Cook salt, Aim toothpaste in oral care, Lipton Tiger tea is the ones to be phased out. The restructuring exercise to be undertaken envisages reduction of brands from 110 to 36 mega brands in 3 years and these brands are to be extended across categories.

The company intends to directly bring out new products into the market to test the waters instead of researching concepts. It also intends to focus aggressively on the products, which are doing well in the market and pull out the ones, which do meet with any response.

"All this augurs well for HLL as it will be in a better position to take on competitors. But for the turnaround to translate into revenues and growth is still sometime away," said Gupta.

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