A growth lever?

An investor in Hindustan Lever would have earned a return of less than 2 per cent if he had bought the stock a year ago.

Compare that to a rise of 95 per cent for the Sensex over the same period, and it's clear that Hindustan Lever suffers from problems. The company's financials confirm this.

Revenue growth in continuing businesses was only 2.2 per cent, on a year-on-year basis, for the quarter ended December 2003. Profit growth too has been under pressure for the year as a whole. The eruption of a price war with Procter & Gamble will put further pressure on margins, although higher rural incomes are expected to result in volume growth.

Cut-throat competition in the fabric care business continues, as low-cost regional players take aim at the soft underbelly of the FMCG giant. And Lever's new businesses are yet to gain momentum. With negligible top line growth and lower margins, it's no surprise that the Lever stock fell sharply after the price war with P&G started.

Of course, personal products have witnessed strong growth, as have the "power brands", and it's probably true that lower prices will in the long run benefit Lever more than P&G. But Lever has its work cut out.

At this critical time the company has opted for a new management and business structure. Two main divisions have been created "" one for home and personal care(HPC) products and one for foods. These divisions had already been formed at the global level by Unilever four years ago, as part of its "Path to Growth" strategy.

Two directors were then appointed to head the global divisions, and the change in structure was to improve focus and help with faster decision-making and execution.

Clearly, Lever is following the global model of its parent company. The question is, will the new structure help the company stem the erosion in shareholder value?

It will certainly provide more focus. Instead of having one CEO looking after two dissimilar businesses, the company will have two de facto CEOs looking after independent businesses.

That perception is strengthened by the fact that there is no post of CEO in the new structure, since Mr M S Banga will be a non-executive chairman.

Instead, a four-member national management team will be at the helm. It's useful to note that, during the re-organisation at Unilever, the directors of the two global divisions were given executive authority and profit responsibility for their divisions.

Logically, therefore, divisional heads should report to the heads of the global divisions at Unilever instead of to a non-executive chairman.

In particular, why should the head of the foods division report to the Asia head of the HPC division? These issues are the reason for speculation that the current re-organisation is an interim arrangement.

The more important question to be answered over time is whether Hindustan Lever will be in a better position now to meet the challenges that confront it.