Price cuts eat into HLL market cap

M-cap down Rs 8650.72cr in one month

The fast moving consumer goods major Hindustan Lever Ltd (HLL) has lost a whopping Rs 8,650.72 crore in market capitalisation to Rs 33876.37 crore in the last one month with the stock crashing from Rs 197 on February 9 to Monday's close of Rs 154, which is nearly an eight-month low.

The stock, after some value-buying, appreciated from its low of Rs 145 to Rs 157, before selling pressure across-the-board pulled the stock down to Monday's close of Rs 153.90.

The recent price war between FMCG majors HLL and Procter & Gamble (P&G) has compounded the sluggish demand growth in the sector. The recent price cuts and retaliation have led to aggressive selling pressure in most FMGC stocks.

The market cap of FMGC companies has fallen by Rs 8,287.49 crore in the last one month to Rs 7,9146.10 crore as on March 15, 2004 as against Rs 87,433.59 crore on February 9, 2004.

Other sector players such as Nirma, Colgate Palmolive, Gillette India, Godrej Industries, and Nestle India have lost market cap in the range of 7-12 per cent in the last one month.

However, ITC managed to gain substantially on the back of funds shifting investments from HLL to ITC.

According to dealers, a shift is happening within the FMCG sector in favour of ITC because it has shown a modest growth in net profit in the current year, while HLL's performance has been affected due to sluggish demand and competition from low priced products.

"ITC is a good stock to bet on as it has a diversified cigarette and paper business," said a dealer with a local brokerage.

The ITC counter has witnessed an upward trend with the company's market cap going up from Rs 24,668.63 crore to Rs 27,234.90 crore on March 15.

An FMCG sector analyst with a leading domestic broking house said: "The lack of volume growth has resulted in the recent price wars, as a result of which profitability of most companies is a major concern. Recent price cuts by P&G will make price hikes in the premium category of soaps and detergents difficult. Thus we believe that HLL is likely to have a weak first quarter of 2004-05, although overall operating margins may still improve upwards by the end of 2004."

Market analysts say the price war in the detergent segment will affect HLL's profit margins.

HLL has a 40 per cent share of the Rs 4,000 crore detergent market.

HLL posted a 2.94 per cent rise in net profit to Rs 494.72 crore in the year ended December 2003 on a total income of Rs 2,684.53 crore.

The margin for the quarter ended December 2003 remained almost flat at 23.62 per cent as against 23.69 per cent in the same quarter last year.

However, the head of research with a broking firm says inflation would benefit HLL as competitors will be forced to raise prices, while HLL could hold the price line and try to gain market share in the long run.

This would be facilitated by their ability to dictate costs, as they were the largest buyers for most inputs.

However, he conceded that operating margins in the personal products segment could be under pressure with aggressive moves by competitors.