Bad hair days

Unilever lowers guidance. What does it mean for HLL?

Unilever has lowered its guidance for CY2004, and one of the reasons given is "a further intensification of competitive pressure on its positions in Asia, particularly in the laundry and hair segments".

Further, one of the ways Unilever is panning to tackle this is step up market activities and increase support investment. These include some necessary adjustments to price points, as well as heavier support behind a number of high quality innovation activities.

A big chunk of Unilever's revenues in Asia come from HLL, which continues to face stiff price competition in the laundry and hair segments.

In the quarter ended June, HLL's earnings before interest and tax had fallen 30 per cent mainly as a result of the price war. Going by Unilever's message to its investors, it seems that the profitability of HLL's laundry and hair segments could continue to be hit, either because of further price adjustments or increased advertising and promotion (A&P), or both.

The HLL stock, however, did not budge, indicating that the markets have already priced in the worst as far as the price war goes. Moreover, since the company is planning to increase A&P spend (even in the June quarter, HLL had increased A&P by 270 basis points as a percentage of sales), volume growth is expected to pick up.

Within the space of two more quarters, HLL will have the benefit of a low base. From the June quarter of 2005, the volume growth as a result of price cuts and higher A&P will be reflected as value growth.

What's more, HLL plans to effect savings amounting to 5 per cent of sales in two years' time. Of course, there could be a negative surprise if volumes in the Laundry and Hair segments don't increase and if the profitability of these segments falls below June quarter levels.

Rubber prices

The tyre industry is seeing a revival in its fortunes as the price of the key raw material rubber has dipped around 12-13 per cent over the last few weeks. This would come as a relief to tyre companies who had been reeling from higher rubber prices until the first half of CY05.

Analysts point to several factors responsible for this reversal in prices "" improved supplies from the key producing region of Kerala as well as the government allowing imports from any port.

This is expected to bring down the freight costs incurred on imported rubber. Local rubber costs are closely linked to landed costs of rubber.

Large tyre companies buy around 40 - 45 per cent of their rubber needs from the spot market. And with costs relating to rubber accounting for over 50 per cent of the total raw material cost, which in turn accounts for 60 per cent of production cost, reductions on this overhead cost are expected to flow directly into the bottomline of tyre companies.

Meanwhile, tyre prices had been raised in the previous financial year to reflect higher input costs and with no reductions in tyre prices announced as yet, the gains on this account are also expected to flow to tyre companies.

Moreover, demand from key customers such as the two-wheeler segment as well as from the commerical vehicule segment has been strong. However, one concern for the tyre industry remains the high input price of nylon cord.

Reasonably small is beautiful

While there's little doubt that India Inc has been doing very well in recent quarters, is that true for the smaller companies as well? A Reserve Bank of India study of the private corporate sector in FY 2004 shows that smaller companies showed higher growth than larger companies.

However, the very smallest didn't have much reason to celebrate, since the study showed that companies with sales less than Rs 18 crore posted net losses.

On the other hand, companies with sales in the range Rs 62 crore to Rs 250 crore saw an increase of 252 per cent in net profits, compared to a rise of only 46.9 per cent for companies with sales above Rs 250 crore. The midcap rally seems to have a solid grounding in the fundamentals.

One reason for the excellent performance could be that it is the large companies who do well at the beginning of an upturn and only gradually do the benefits trickle down to smaller companies, at a later stage in the business cycle.

Sales growth was negative (-9.4 per cent) for companies with sales less than Rs 18 crore; 5.2 per cent for companies having Rs 18 crore to Rs 62 crore as sales; 11.2 per cent for companies with sales between Rs 62 crore and Rs 250 crore; and 19.9 per cent for companies with sales above Rs 250 crore.

But profitability was far more for the big companies with gross profits being 4.5 per cent of sales for the smallest category; 7.6 per cent and 9.5 per cent for the next two groups and 12.9 per cent for the largest companies.

Interest cost as a percentage of sales was the highest for the smallest companies.

With contributions by Mobis Philipose and Amriteshwar Mathur