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HLL fine-tunes growth strategy, makes a few gains

NetScribes / Salil Panchal

Better inventory management and improved EBITDA margins have helped FMCG major Hindustan Lever Ltd defy tough market conditions to generate free cash flow of Rs 15 billion, up 17 per cent from 1999 levels.

In a report issued this week, foreign brokerage ASK Raymond James says that during 2000, HLL witnessed returns on capital employed of 262 per cent.

HLL's detailed annual report released last week shows that the company's inventory management has improved from 54 days of cost of goods to 47 days. There has also been an improvement in sundry creditors and the company has continued to squeeze its suppliers and sub-contractors to improve its working capital.

A major positive for the company is that annualised losses in Modern Foods have fallen to Rs 213 million in 2000 from Rs 482 million in 1999. The management will now focus on improving quality by introducing superior bread ingredients. "Weekly sales increased 100 per cent in December 2000 against April 2000 levels. The management expects Modern Foods to turnaround over the next two years,'' the report says.

In terms of its range of products, detergents have shown a 4.8 per cent volume growth; specific products like Breeze, Lux and Salon have also done well.

In coming months, HLL will focus on further streamlining its distribution strategy. The company is expected to identify key accounts and offer them differentiated services. This will be part of the focus on modern trade. On the other hand, to broaden distribution in the rural markets, it is expected to continue concentrating on project `Streamline' by synergising its diverse businesses to increase reach amongst the rural population.

One of the key strategies for the future is its services initiative. According to the ASK-Raymond James report, HLL continues to be bullish on the beauty salon business. It has already opened 12 such outlets through a franchisee model.

The HLL management will continue with its decision to phase out the export of traded goods and non-value-adding businesses. In 2000, HLL's traded exports declined 10 per cent. The company will aim at aggressively increasing exports by sourcing to Unilever worldwide and focusing on those products where it has a competitive advantage.

Group exports of manufactured products grew 19 per cent and total group exports increased 7.3 per cent during 2000 in line with consolidated revenue growth of 5.1 per cent.

HLL has witnessed new activity through the HLL Research Centre, which recently launched Lux International with patented sun screen technology innovation. In household care, research has helped improve the performance of soap bars while keeping raw material costs under control. In the tea segment also, HLL has developed improved blends and technology to fortify tea with key vitamins and minerals.

However, from a stock market and investment perspective, FMCG analysts remain sceptical about a turnaround for the stock.

"We will have to see the company's performance over the next two quarters. The August-October 2001 period could see a re-rating for the stock,'' said Piyush Goenka, FMCG analyst with First Global, a Bombay-based brokerage. Analysts expect HLL to see a 2-4 per cent growth in topline and a 15 per cent growth in bottomline.

"HLL has focused on the rural market and its restructuring programme for some time. It has also made a conscious effort to cut down on its branded and traded products from 110 to 30. But it remains to be seen how successful it emerges in the rural market over the next six months,'' said an analyst at another Bombay-based brokerage.

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