Can HLL surf the rising tide?

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Arun Rajendran | March 15, 2004

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If the FMCG marketplace can be compared to a choppy sea,
till recently no one had any doubt about who rode the waves:
Hindustan Lever. Related Stories

A squeaky clean fight

Well, the seas have got choppier still, and no one can be sure
P&G kicks off sudsy war
how well HLL can weather the storm now. Already forced to
fight price wars with regional brands in several product Price cuts not to hurt HLL
segments, Gulliver of Lilliput is now facing Goliath.
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• Special: A squeaky clean fight

This has forced HLL to batten down the hatches and follow suit
by reducing the prices of Surf Excel and Surf Excel Blue. And
that may not be the end of the story: With P&G now planning
to launch its global toothpaste brand Crest, the FMCG market
is going to see even more turbulence.

So where does this leave Levers? If you were to ask the

punters, the answer is down in the dumps. The HLL scrip has
been foundering on the rocks and has been mauled by bears
ever since the P&G price cut.

In fact, the magnitude of the fall can be gauged by the fact that
the scrip lost over 11 per cent in just six trading sessions.
That's not all.

On March 8, HLL's P/E ratio fell below that of the BSE Sensex
after staying resilient even during the crisis period of April-May
2003, when the stock price hit a major low. The Sensex P/E
has held its ground at 19.26. However, plummeting HLL prices
resulted in its P/E slipping below that of the index to 19.20.

The outcome of the price wars is anybody's guess, for as yet

there are no answers to many questions. Will sales volumes
grow to make up for t he drop in prices? How will market
shares get redistributed? And, most importantly, is it time to
dump HLL or hold on?

P&G's move actually did not take analysts by surprise. Some

say that it was just a matter of time before this happened.

Says Nikhil Vora, FMCG analyst at brokerage and research

firm SSKI, "P&G's new-found India love comes on the back of
a successful relaunch of its detergents offerings, coupled with
shampoos. It is now being backed by its strongest global
brand, Crest." Vora says that there is certainly strong merit in
P&G's India strategy.

"The market share of P&G in all categories - be it oral care,

detergents or shampoos - is below 10 per cent. However, by
playing the price card, it has virtually forced an existing
dominant player like Hindustan Lever to come down the price
ladder and redefined the pricing equation in the market. This
effectively weakens the contribution margins for market
leaders."

Perhaps, a pointer to the approaching storm was hidden in the

December quarter results of HLL, which disappointed analysts
on both topline and bottomline. For the full year, net profit was
up merely 2.9 per cent to Rs 494.72 crore (Rs 4.947 billion).

However, post-extraodinaries, net profit growth was flat. Total

income decreased to Rs 2,684.53 crore (Rs 26.845 billion) in
2003 from Rs 2,735.22 crore (Rs 27.352 billion) in the same
period last year.

This was a total anti-climax for analysts who were expecting

much better things from the company given that it had
recorded its sharpest topline growth in seven quarters with a
4.2 per cent growth year-on-year (y-o-y) in the September
2003 quarter, led by the beverages and personal care
businesses.

The effect of the price war on HLL's bottomline and product

portfolio will take some time to figure out, but what is certain is
that there is certainly going to be some upheaval. HLL's
portfolio presently looks skewed with a lot of its brands now
competing in the same price range.

For instance, Rin Shakti and Surf Excel Blue are now at the
same price point of Rs 42 per kg. Surf Excel Blue had recently
been re-launched, possibly to convert Rin Shakti users to Surf
Excel Blue.

Also, the difference between Surf Excel and Rin Supreme has
narrowed down considerably. This will inevitably lead to some
cannibalisation. Analysts say it's only logical for HLL to resort
to more price cuts to correct this anomaly, thereby leaving no
doubt that margins will take a hit in the short run.

The price cut by P&G has resulted in a repositioning of Tide in

the popular segment. Consumers could well see a huge value-
for-money proposition in Tide and downtrade to Tide from Rin
Supreme.
Where does this leave the premium section? Nowhere, say
analysts. With the price cut, P&G has virtually killed the
premium segment and reduced the detergent segment to the
mid-price and popular segments.

Not surprisingly, HLL is not on anybody's wish-list right now -

and that is putting it kindly. Analysts say competitive pressure
is at an all-time high and HLL's stranglehold in various
segments is going to pass through the most testing of times.

"Ten years ago, HLL had a virtual monopoly in all the market
segments, but look at the situation today. The dominance does
not even extend above two or three categories," says Rajiv
Sampath, head of research at brokerage and research firm
Parag Parikh Financial Advisory Services.

"The scrip has been underperforming the Sensex for the last
two years. Its December results were not encouraging at all
and one should not expect anything rosy in the next two
quarters at least," adds Sampath.

Margin woes

HLL has been bearing the brunt of low margins, and had been
bereft of margin gains in its soaps and detergents portfolio, for
the last five quarters.

In fact, the 2.2 per cent drop in the overall EBITDA in Q4 FY03
was the worst rate of fall in the last few years. Analysts expect
the slippage in EBITDA margins to continue, if not increase, in
the next few quarters.

Analysts attribute this to continuing stress in detergents and

beverages which account for about 28 per cent of the
company's turnover and significantly lower profitability in
exports, owing to the rupee's appreciation. Exports ,
incidentally, account for 12 per cent of its turnover.

The main effect of the price drop is that detergent sales in

value terms could drop by 5.1 per cent in CY04. This, in turn,
means that EBITDA growth in detergents would be further
muted to a 1.4 per cent against analysts' earlier estimates of
7.7 per cent, resulting in a 70 basis points erosion in EBITDA
margins to 18.8 per cent.

"Reality bites," says an analyst from a leading brokerage. "The

margins clearly need to be realigned to a more realistic
scenario and high margins of 25 per cent definitely cannot be
sustained anymore," he adds.

To compound the situation, input prices for toilet soaps have

risen over 50 per cent since September. In the September
quarter, palm oil prices rose 27 per cent.

Also, the average prices of palm oil were 10-12 per cent higher
in the quarter ended December 31, 2003, against prices in the
quarter ended December 31, 2002. To pass on this steep
increase in input prices, HLL raised the price of Lux soap by
50 paise.

However, analysts feel that the measure falls flat, especially if

one takes the inflation factor of around 4-5 per cent into
account. In fact, including this, the actual price increase is
negative, which brings an element of deflation in the scenario.

Competition

As part of its initial strategy, P&G has delivered twin hits to two
very profitable segments of HLL - detergents and shampoos.

However, analysts say the introduction of its world-wide

bestseller Crest may hurt HLL more, since Colgate and Dabur
have also been rather aggressive in pushing their products.

To be sure, some analysts feel that P&G's small presence as

yet is rather too weak to make any significant gains in market
share even after the price cuts.

P&G was a not even a close competitor to HLL, commanding

a measly 5 per cent of the total detergents market while HLL
had a commanding 40 per cent.

But they give credit to P&G for forcing HLL to cut prices by
over 20 per cent and analysts say the pricing pressure in this
segment will inevitably reduce its profitability. Once that is
done, P&G would look at building its sales and distribution to
build on initial gains.

Another point is that P&G, which markets its detergents

through its unlisted company, can afford to take a hit in the
bottomline by funding losses from abroad. But HLL, as a
publicly listed company, will face selling pressure in the share
market.

Distribution

HLL's biggest strength so far has been its unmatched

distribution reach. This enabled the company to make the
most of an undeveloped and undercapitalised retail market.

Analysts see the advent of organised retailing having the effect

of diminishing the power of FMCG companies to insulate their
margins. Analysts say organised retailers are set to increase
their market share from less than 2 per cent currently to over
10 per cent over the next five years.

"Organised retailing thrives on extracting incremental margins

from manufacturers, and FMCG players would not be
insulated from this for long, impacting their realisations in the
process," says an analyst.

To add to the gloom, the much promised rural boost has not
kicked in as yet. In the past, when the company was already
struggling for topline growth, it made up for the slack by fairly
steady bottomline growth. But looking ahead, even this will be
under pressure, given the price wars.

The key development to watch is the increase in rural demand.

Analysts say cash flows from the kharif harvest will start
flowing in from the quarter starting April.

This could see highly penetrated categories like soaps and

detergents, which have consistently registered a declining
sales trend, seeing a turnaround in fortunes.

The reason for the optimism is the farming community in the

country is likely to garner a higher cash surplus by about Rs
40,000 crore (Rs 400 billion) after the kharif crop harvest
compared with last year. The fact that about 50 per cent of
HLL's revenues come from the rural areas is a factor that
would work to its advantage.

Analysts say the company needs to support sales by

heightened market activity for new categories. HLL's poor
showing in growing businesses such as bakery products and
water and the absence of new growth engines have not gone
down well with analysts.

This is compounded by the fact that incremental consumer

demand for FMCGs remains low. Analysts expect earnings
growth to remain subdued over the next couple of years on
account of sedate topline growth and subdued margin gains.
They expect an EPS of Rs 8.2 FY05. The telling point is that
the stock has lost its allure with analysts.

"Earlier HLL used to be an attractive dividend yield play

around the Rs 135 levels. Now that growth has faded off, there
are many stocks in the sector like Nestle which are looking
more attractive," says Sampath.

However, the stock does have its share of support. "The stock
has been punished more than it deserves," says an analyst
with a leading domestic brokerage and research house.

He adds that the stock is presently perceived negatively

because of Q4 numbers and the price cuts. But price cuts can
improve volumes and the impact on profits may not be more
than 10 per cent. HLL has an enviable position in certain
segments like skincare which commands loyalty and is not
affected much by price changes.

Once rural demand kicks in, things will look much better two or
three quarters down the road. That could possibly pave the
way for a re-rating, he adds.

But then, most punters will probably wait the period out to
check whether the quarterly numbers reflect the rural revival.

HLL's brand pull takes a beating

TIMES NEWS NETWORK [ TUESDAY, AUGUST 01, 2006 12:20:16 AM]
 MUMBAI: Going by Harish Manwani, president, Unilever (Asia/Africa)’s insistence on
looking at market share as a strong performance indicator, HLL’s numbers for the quarter
ending June ’06 should be a cause for concern.

Market shares in major categories like laundry, toothpastes and skin care have dipped,
while the company has held shares in personal wash and shampoos.

A combination of a clear strategy of brand investments and a robust rural growth has, of
course, helped the consumer goods major report a 12% volume growth in its FMCG
business. The stock was quoted at Rs 232.3 on Monday, down by 4% — an indication of
‘lower-than-expected’ market expectations.

In its main business of home and personal care (HPC), the company has lost market share
in personal wash, from 54.9% in the June ’05 quarter to 54.5%. Its market share had
increased to 55.9% during the March ’05 quarter, but later slipped. In this category,
Lifebuoy was doing well; Lux was facing a decline, but has recovered.

However, Breeze is still under pressure. Its market share in toothpaste has also declined
from 32.5% in June ’05 to 30.2% in June ’06. What’s surprising is that in fabric wash —
a category where its sales have been quite healthy (the June ’06 quarter sales growth for
soaps and detergents was 13%) — the market share has declined.

Fabric wash share during June ’06 quarter declined to 36.6% from 38.2% in the quarter.
Shampoo share recorded a marginal improvement, from 47.5% to 47.7. Company
officials have attributed the lower market share numbers to the lag effect of AC Nielsen’s
market research studies, which do not yet reflect the rural growth rates.

“If that be the case, the market shares should have at least been constant rather than
actually declining,” said an industry analyst. Overall, the company’s performance reflects
its efforts at cashing in on an upbeat consumer mood through product innovation,
distribution initiatives and market activation.

The company has relaunched quite of few of its HPC brands like Lifebuoy, Sunsilk Surf
Excel and several other variants. The HPC category has done well with sales growing by
about 13%. HLL is yet to spring any surprises with foods.

In the foods category, the beverages segment has been a disappointment as sales have
declined 3.7%, while its segment profit has declined by 24.5%.

Beverages, Foods and Tobacco - FY06

 Market Market
Product Growth Penetration
size size Features
(Rs m) (tonnes) (%) Urban Rural
Intense competition in the segment with players like Pilsbury,
HLL, Agro Tech, Nature Fresh and ITC. The competition is
spurring the growth. The segment that was growing at a rate of
Branded 20%-
16,000 800000 97% 93% 40% to 45% till FY00, grew by around 15% to 17% in FY06.
Flour (Atta) 25%
ITC is the market leader with 40% markt share.The market has
huge potential, as even in the urban areasc( mkt size: 40MT),
branded atta accounts for a miniscual 3% of consumption.
Bakery item 80,000 12% 60% 20% Britannia dominates the bakery segment. It ranks No. 2 behind
Packaged parle in the branded biscuits segment, in volume terms. In the
50,000 1250 12% value terms however it is the leader with 38% share. ITC is
Biscuits
also an aggressive plater in this segment wih 10% market
Cakes 800 70 8% share. Local manufactures dominate 80% of the bread
segment. Modern and Britannia are major players in the bread
Bread 12,000 1400 6% market ( 7% share and 5% share resp) and together account
for 90% of the organised bread market.
Nestle( Maggi) anf HLL( Kissan and Knorr) dominate the
Culinary
15,000 - 10% 60% 15% segment, as both have a large portfolio. ITC is the lastest
Products
entrant wth Pasta treat.
In FY06, Indian tea production stood at 907 kgs, an increase of
10.6%from FY05.The industry is characterised by a large
number of unorganised players. The leading 15 players account
for only 39 % of the total demand of 787 million kg. HLL lead
Tea 90,000 959,000 2% 90% 90%
the market with 11% share , while Tata Tea was second at 8%
share. Exports too registered a strong growth. Going forard
domestic consumption would continue to grow at 3.3 % per
annum and this would gain importance.
Segment is dominated by Nestle (60%), HLL's Bru and Tata
Coffee. The prices in FY06 remained flat, due to strong
Coffee 9,000 - 5% 35% 10% inventory levels in the majot consuming countries.The trend of
introducing small packets continued. Export performance was
volatile due to competition.
Smithkline Beecham's Horlicks ( 55% market share) and Boost
(10%) market share continue to dominate the segment.
Cadbury's Bournivita, Nestle's ' Milo' Heinz's ' Complain' and
Health Amul's Nutramul' are other players. The companies did witness
13,000 120,000 10% 25% 16%
Beverages pressure on the input cost in FY06. Going forward the
companies have planned to increase the distributio reach. With
changing lifestyle, growing income this segment is in for good
prospects
Amul continues to outdoboth Britannia and Nestle in the cheese
and butter segment. Amul and Nestle are more or less equal in
the branded yoghurt and packaged milk segment. Smaller
Milk and reginoal players are too knocking the door. With the
Dairy 30,000 10% 85% 60% upgradation of cold storage chains, expansion of this segment
products is likely to start.

ITC continues to dominate the segment with over 70% market

125 bn
Cigarettes 120,000 4% 95% 30% share. However the restrictions ( ban in public place) and the
sticks
taxes imposed by the governments, did impact the sales.

Bru overtakes Nescafe as coffee drinkers' first choice

Saturday, March 04, 2006

HLL's Bru has pushed Nestle's Nescafe to the second place. Market researcher AC Neilsen's all-India retail
numbers that have just come in suggest that Bru has established market leadership with 44% branded
coffee drinkers preferring it. However, Nescafe continues to be more popular among instant coffee drinkers.
The Rs 511 crore coffee market consists of instant and roasted and ground coffee. Nescafe enjoys the larger
share of the Rs 361-crore instant coffee market.
Instant coffee and roasted and ground coffee cannot be compared as there is a clear north-south divide.
While south India prefers roasted and ground coffee, popularly known as filter coffee, north India likes the
instant variety. Bru has sales of Rs 224 crore as against Nescafe's (Classic and Sunrise) sales of Rs 214
crore in 2005. AC Nielsen says Bru has captured value leadership by a thin lead of 2.6% over Nescafe. The
survey put Nescafe's share at 55.3% and it continues to be the leader in the instant coffee market. " Bru is
still at number 2," according to a spokesperson of AC Neilsen.