HLL and Gujarat Ambuja's dismal showing reflect the slowdown in the economy, and don't augur well for the next quarter.
Hindustan Lever's results are disappointing not because they reflect sluggish growth in the markets but because the company has lost out to increasing competition in the lower priced segments.
The company has lost market share in the personal wash, skin care and tea categories. Overall, sales as well as volume growth has been flat. And yet, true to its tradition of "managing" costs, HLL has managed to post an increase of 16.1 per cent in profit after tax (PAT).
If transfers/sales of businesses and restructuring are excluded, the growth in PAT has been 12.1 per cent. Operating margins have gone up. But there's no question that profit growth has slowed.
Net profit growth was 26.4 per cent in the second quarter, while sales growth for the first half was 5.8 per cent. It was operating efficiencies, and lower raw material costs that buoyed profits in spite of flat sales, along with growth in the premium segment.
While the growth in operating profits has fallen off from 18 per cent in the first half to less than half that figure in third quarter, higher "other income" and lower provision for taxation helped the company maintain decent growth in earnings per share.
What's the forecast? Slowing agricultural growth, a rise in petroleum prices and a fall in consumer demand as a result of floods and drought will all take their toll on HLL in the next quarter.
Among the categories, apart from the fall in market share in personal wash and skin care, tea sales declined by 10 per cent, compared with a growth of 16 per cent in the first half. Ice cream growth continued to be flat.
Even in the categories that have done relatively well, growth has actually slowed compared to that in the first half. Examples are fabric wash, household care, hair care, branded staples.
There were a few success stories -- deodorants, culinary products, while oils and fats volumes doubled. But the overall picture is of a slowdown.
The old question of how long HLL can continue to manage costs without topline growth needs to be supplemented with the fact that this quarter's growth in profits has been boosted by a 10 per cent decline in consumption of raw/packing materials and a per cent decline in purchase of goods.
Can that be kept-up? There is, after all, no alternative to topline growth.
Gujarat Ambuja
The Old economy is getting deeper into a rut. The macro figures on lower GDP, lower IIP, et al are being complemented by stagnant toplines and sagging bottomlines of the Old economy companies.
The Gujarat Ambuja (GACL) results mirror the slowdown. GACL's earnings fell by 50 per cent this quarter (first quarter) even as sales saw a marginal rise of 3 per cent. That the quarter was going to be bad was expected, yet not many were expecting the halving of profits.
The reasons for the drop in profitability: the depreciation in the value of the rupee and higher oil prices. GACL imports fuel oil for running its 58-mw DG sets besides importing coal. Obviously, costs shot through the roof.
Though OPM has gone down considerably compared to previous year's second quarter, the company has been able to maintain its margins compared to the previous quarter ended June 2000.
The drought situation in some of GACL major markets including Gujarat didn't help demand growth. The slump in demand has seen a drop in the realisations of the company as well. Net realisations per tonne have fallen almost by Rs 100-1930 this quarter compared with that in last year's first quarter.
A fall of five per cent in realisations is significant, point out analysts. GACL would also have been hit because it no longer avails of the power subsidy in Himachal Pradesh. This ceased to exist in October last year and the impact of this won't be felt from the next quarter.
That doesn't mean the scene will be any better next quarter. Oil prices haven't retraced much from their high levels and there is hardly any sign of pick-up in demand. Clearly, the next quarter is likely to be more of the same.
Mastek
Mastek's results show why information, communication and entertainment stocks are so volatile. With technology changing so fast, the fortunes of companies in the field can change equally fast.
That's not the only reason. When a company like Mastek depends on a few clients for a big chunk of its business, there is even more reason for volatility. In the event that a company loses one of these big clients, earnings are impacted to such an extent that there is major re-rating of the stock.
For instance, Mastek is still to fully recuperate from the blow dealt by one of its main clients, who walked out on the company. The Mastek management has listed this as one of the reasons for its poor showing this quarter.
During the quarter ended September 2000, its revenues grew at just 13 per cent and its earnings went up by about 28 per cent. Now, that is hardly the kind of growth you would expect from a tech company.
The markets too endorse this view as the scrip was hammered 16 per cent yesterday. Also, Mastek still has four big clients who account for over 6 per cent of the business each. Clearly, this should be a reason for concern for investors.
Despite the fact that Mastek's repeat business is around 90 per cent presently, one would have to keep in mind what happened last year. Also, considering that Mastek lost this client late last year, it is interesting to see how it has fared vis-
