HLL share's southward shift unchecked

Fast moving consumer goods (FMCG) giant Hindustan Lever (HLL) has consistently underperformed the key indices ever since the demand recession set in the FMCG sector.

In the last five years, the HLL stock has declined at a compounded annual rate of 1.64 per cent. Compared to that, the 30-scrip Sensex has appreciated at a CAGR of 11.41 per cent.

The fall in the HLL stock has been more steep in the last three months as the company's sales growth rate numbers have failed market expectations.

In the year to December 2003, HLL's sales were down around three per cent and net profit fell by around 1.74 per cent year on year.

Over the last two weeks, HLL has announced a series of price cuts of key products-price of Surf Excel has been reduced by 27 per cent, of Surf Excel Blue by 7 per cent and prices of shampoos""Sunsilk and Clinic Plus have been cut by an effective 50 per cent.

No wonder the stock has lost 26 per cent between December 31, 2003, and April 15, 2004. The sharp underperformance of the company on the sales and profit fronts saw HLL's valuation decline substantially in relation to the price to earnings multiple (P/E).

HLL's P/E which used to be at a premium over the benchmark indices, fell from 45.32 in 1998 to 19.41, at present. This is despite the company having doubled its net profits from Rs 837.44 crore in the year ended December 1998 to Rs 1687.37 crore in the year ended December 2003.

Analysts, in chorus, reiterate a sell rating on the HLL stock on the back of stiff competitive pressures in the Indian consumer market and dull profit growth outlook. As a result, HLL's valuations look expensive even at current levels. HLL is trading at P/E of 18.20 based on estimated earnings for the year ending December 2004 and 16.2 times on estimated earning for December 2005.

This makes HLL among the most expensive consumer stocks globally relative to profit growth potential.

Relative to the BSE Sensex, HLL is now trading at a P/E premium of 40 per cent. Though it has corrected sharply from its 8-year average premium of 90 per cent, analysts believe the current premium is unjustified given estimated flat profits in the current year.

HLL has announced a number of price cuts over the last two weeks. This, according to analysts, will lead to 6 per cent hit on net profit in 2004 even after assuming higher volume growth and some scale benefits. As a result, analysts have cut their earning per share (EPS) estimates by 4.3 per cent in 2004 and by 2.2 per cent in 2005.

Analysts expect HLL to report an EPS of Rs 8 in the year ended December 2004 and Rs 9 in December 2005.