New buoyancy

The latest quarterly results of Hindustan Lever convey new buoyancy in the company. While its net profit shot up by 35.12 per cent to Rs 380.59 crore for the second quarter of 2006, its net sales moved up by 8.7 per cent to Rs 3,083 crore, as against Rs 2,836 crore last year. While the single-digit improvement in sales is nothing to write home about, especially in the context of stagnant top line in the past, the overall results confirm that the company is now on a growth track once again, as it has been for the past few quarters. This could be because the fast-moving consumer goods (FMCG) sector as a whole has been doing well, but there also seem to be company-specific factors at work. The company itself says that the key drivers for this are cost-saving initiatives, improved buying efficiencies and selective price increases. Certainly, the last is possible only if the market conditions permit such increases, and the general buoyancy in economic conditions must therefore have helped.

A company with as much management depth as Lever will not usually ascribe a change in performance to changes at the top. The fact, though, is that there were top management and organisational changes effected last year. While Harish Manwani took over as non-executive chairman from MS 'Vindi' Banga, the company also inducted a new CEO, Douglas Baillie. The argument is that with a full-time CEO now, as against two managing directors for the foods and home and personal care (HPC) divisions, respectively, there is greater focus and attention to management issues. It may have also helped that Mr Manwani and Mr Baillie have worked together in the past.

One question is whether the new team has introduced a new business strategy. For instance, a focus on power brands was introduced some years ago""and the initial hiccups suggested that the scheme was not working very well. Indeed, the new team at the top is said to have deviated from the power brands strategy. A detailed analysis of which brands have contributed how much to growth, will help clarify the picture. For instance, the company has been engaged in a slew of innovations and product improvements. There have been a number of new variants, re-launches and new launches from the Lever stable in the last one year. Analysts also confirm that the company is now more willing to develop potential products, unlike the strict focus on power brands in the past. In short, growth may have been helped significantly by brand proliferation""which would seem to confirm a significant change in strategy.

Then, the company has shifted a part of its manufacturing base to states that give tax advantages. Production at Baddi in Himachal Pradesh and Hardwar in Uttaranchal is now in full swing and this gives the company the ability to price its products competitively. In short, there are many factors that will help explain the surge in profits. What needs focus now is sales growth.