HLL: Leveraging growth

HLL finally delivers growth

The markets weren't wrong in predicting that growth would pick at Hindustan Lever. The stock had been re-rated by around 30 per cent in the past quarter, mainly on the bet that growth would pick up for FMCG companies.

HLL didn't disappoint, reporting a 10.3 per cent jump in revenues last quarter, considerably better than the 6.5 per cent growth it managed in the March quarter. Also, domestic FMCG sales grew by 11.8 per cent, the highest in the past 24 quarters.

The company has done well in categories where competition has been the highest "" growth exceeded 20 per cent in shampoos, while the laundry segment also grew in double-digits.

What's more, the foods business, revenues of which had fallen by 3 per cent in the March quarter, grew by 10.9 per cent last quarter.

The June quarter marked the anniversary impact of the sharp price cuts in the key soaps and detergents segment. As a result, the negative impact of a high base has largely been played out, which has facilitated not only revenue growth, but also profit growth.

Margins in the soaps and detergents segment fell just 125 basis points last quarter, compared to 800-900 basis points drops in the previous four quarters. HLL's operating profit grew marginally by 4.7 per cent y-o-y, after a gap of at least four quarters. Growth was much more impressive on a q-o-q basis at 33.4 per cent.

The other reasons for the improvement in profitability were price increases taken by the company this year, a strong 17.4 per cent growth in personal products business (which is the most profitable for the company), and a drop in the losses of the foods business.

Analysts point out that HLL would also have benefited from the implementation of VAT, as it would not only get an edge over unorganised players, but would also save on state taxes.

Although operating profit growth was just 4.7 per cent, profit grew 17.9 per cent at the PBT level thanks to higher treasury income and a sharp drop in interest cost because of the redemption of the bonus debentures.

The stock now trades at about 29 times CY05 earnings and 24 times CY06 earnings. While growth earnings is expected to be in high double-digits going forward, it's not expected to be anywhere near 30 per cent, which is the rate at which HLL should grow to justify its current valuations.

Defying gravity

The market continued with its gravity-defying act on Tuesday, with the Sensex moving up another 86 points. The market has resolutely ignored all bad news coming its way, including the losses on account of the rains in Mumbai, the ONGC fire, oil prices crossing the $60 a barrel mark, the RBI raising the risk weighting for loans to market participants, the intransigence of the Left on the BHEL divestment, and the disappointment over the tech results.

Even the losses made by the oil marketing companies has not deterred investors, with these stocks recording smart gains on Tuesday. The reason, of course, is very simple""-the liquidity in the market.

Various theories are now doing the rounds as to why the money will keep flowing in. One of them is that Japanese investors, the Indian market's newest friends, are satisfied with a very low rate of return, with the 10-year JGB yield at 1.3 per cent.

With returns like that back home, Japanese investors don't mind buying at such high prices, because even a 6 to 8 per cent annual return would be great for them, especially given the strength of the rupee.

The theory, however, doesn't explain why the run-up in the Indian market mirrors the euphoria in other Asian markets, with the MSCI index of non-Japan Asian shares striking its highest level since 1997 on Tuesday.

M&M "" tractors drive growth

M&M's tractor division has posted an exceptionally strong growth of 53 per cent y-o-y in the June quarter, which has resulted in an overall sales growth of 27 per cent.

In the process, it has managed to up its market share to 32.4 per cent, a gain of 500 basis points. That too by getting a good price for its products, since the volume growth was just 28.4 per cent.

Ever since the tractor industry bottomed out in the second half of FY04, M&M's tractor segment has ouperformed the industry.

The automotive division, where the competition is keen, turned in a more sedate 14 per cent topline growth with the company selling lower volumes of three-wheelers and LCVs though it managed to grow UV sales.

The operating profit grew 20 per cent but the operating margin slipped by 70 basis points to 10.6 per cent. That's because even though raw material costs as a percentage of sales were contained at 68.9 per cent, which means the company is able to get the benefit of higher volumes, other expenses were up. The increase in the net profit of 40 per cent seems impressive.

However, without a writeback of interest, deferred tax and a much higher other income, totalling Rs 34 crore, the growth would have been just seven per cent. Adjusting for an exceptional item in Q1FY05, the growth would be 33 per cent.

Looking ahead , with the monsoons on track, a good kharif could mean a bumper year for tractors.

The auto business, however, could continue to face competition though M&M is the market leader in UVs. The stock has gained more than 10 per cent in less than a week. At the current price of Rs 675, the stock trades at a forward multiple of 14 times FY06 expected earnings and appears to be reasonably valued.

With contributions from Mobis Philipose and Shobhana Subramanian