Vindi Banga, Chairman, HLL: Global ambitions

We see sourcing as a stable opportunity, which is more profitable than our current exports. We have got a few orders from Unilever Australia, Europe and the US (a trial one), but you have to remember that there is no rapid ramp-up in this business. Vindi Banga, Chairman, HLL

At every annual general meeting (AGM) of consumer goods colossus Hindustan Lever Ltd (HLL), the Chairman delivers a speech that sheds light not just on the company's prospects but that also throws up suggestions on how the country's growth engine can be cranked up. With good reason: the Rs 11,780-crore manufacturer of home and personal care (HPC) items and foods is dependent for at least a third of its growth on macro factors like gross domestic product (GDP) and agri-growth numbers. In 2001, for instance, Chairman M.S. Banga, at his first AGM, focused on fuelling a food revolution, and the importance of agriculture in propping up overall GDP growth.

A year later, on June 26, 2002, Banga chose to delve on another component that could rev up the Indian growth mill: manufactured exports. "I believe India should aspire for an export growth of 20 per cent annum over the next decade-nearly double the current target of 12 per cent in our Tenth Plan," suggested the Chairman. If that sounds like a routine feel-good CEO soundbyte, hear out the relevance of a boom in manufactured exports to HLL. "HLL's vision is to build a billion-dollar (close to Rs 5,000 crore) sourcing business out of India."

Last year HLL's exports totalled Rs 1,750 crore, roughly half of which was accounted for by sourcing to global Unilever bases as well as third parties. Banga hasn't outlined a timeframe for hitting the Rs 5,000-crore mark; HLL officials point out it's not in the public domain. Yet, in the perspective of Lever's current operations, that figure makes up 42 per cent of its current gross revenues, and almost 30 per cent of the total sales of Rs 17,200 crore projected by some analysts for 2005.

Of course, if the HLL top brass hopes to make the outsourcing business worth Rs 5,000 crore over the next four years (the company has a December year-end), it would have to grow the current exports business by almost three times in that period. The outsourcing component, (currently worth Rs 875 crore) would have to spurt by 65-70 per cent annually if Lever hopes to hit the billion-dollar mark by 2005. Clearly, that target isn't going to be hit any time soon. "The outsourcing operations can be significant, but it's going to take a long time, as the gestation period is huge," avers Sujay Mishra, equity analyst (consumer goods) with Kotak Securities. Adds Nirav Seth, who tracks HLL for SSKI Securities: " Currently, it (sourcing) is an ancillary business, and HLL will need to increase its exposure rapidly. I can't see it making a meaningful contribution in the medium term."

Banga for his part is under no illusions that outsourcing can contribute meaningfully (to the top line as well as profits) overnight. "I see it as a stable earnings opportunity. Inventory and marketing costs are minimal, and it can be more profitable than our current traded exports operations. But this is a business that has a long incubation time, where there is no fast ramp-up."

There's little doubt there exists a huge outsourcing opportunity, what with the top 20 FMCG companies generating sales of $450 billion, and most of the manufacturing located in high-cost regions. Now add to that the fact that manufacturing and conversion costs in India are much lower, and you have a tailor-made growth option. For instance, capital costs involved in making toothpastes in India are 65 per cent lower than in Europe, and conversion costs are 85 per cent lower. Similarly, conversion costs in sourcing tea bags are 25 per cent those in the US.

That's why HLL is banking on its innovation capabilities in the home and personal care segment, as well as its knowledge of plantations, and grading of teas in sourcing tea bags and instant teas to the West. HLL has bagged an order from Unilever Australia for tea, a toothpaste order from Europe and a trial order for tea bags from the US. HLL exports Pepsodent, Close-up and Signal toothpastes, soaps like Lux, Lifebuoy and Pears, skincare brands like Dove, Vaseline and Fair & Lovely, Persil and Breeze fabric washes, Comfort fabric conditioner and Sunlight dishwash to Unilever companies in North America, Europe, Russia, Central Asian Republics, the Middle East, South East Asia and parts of Africa. Branded packet teas and tea bags (Lipton Yellow Label and Brooke Bond Red Label) are exported to Unilever bases in the Middle East, Australia, the US and Europe. HLL's soaps and detergents unit near Nagpur is the only source of the Pears brand for all Unilever bases.

HLL isn't the only FMCG major that's sensed the sourcing opportunity. Procter & Gamble's (P&G's) India operations too have been identified as a key hub in P&G's global sourcing strategy, which revolves around deriving the best cost-efficiencies from within the P&G world. Currently Vicks Vaporub is sourced out of India for all Asian countries, except China, even as P&G has identifed far-eastern bases for sourcing of shampoos and sanitary napkins. Other material that P&G sources out of India includes psllium husk, menthol and Pseudoepherine, worth Rs 100 crore annually. "We derive cost efficiencies by importing from a centralised manufacturing base versus setting up separate manufacturing bases in individual countries," explains Ashok Chhabra, Executive Director, P&G India. In our view more than products like shampoos or sanitary napkins, India is a very attractive source for drug products, which have a great competitive advantage."

It isn't as if outsourcing is suddenly the next big thing to have caught the eye of the Indian manufacturing sector. A low-cost base coupled with the country's engineering and design skills have resulted in many multinationals zeroing in on India. "Manufacturing centres like Taiwan, Korea and Japan have become high-cost economies. India is well-positioned as far as labour costs are concerned," points out Sudarshan Sampathkumar, Engagement Partner, Accenture. So you have companies ranging from Ford and gm to Whirlpool to Reebok to Emersen to Clariant (see boxes) making a move on the outsourcing front.

For HLL, however, the outsourcing gambit assumes significance as it opens another window for much-needed growth. For nine straight quarters now, Lever has been feeling the effects of a sluggish economy. This is manifested in single-digit revenue growth rates (in the latest quarter ended June HLL's FMCG sales inched upwards by 1.7 per cent), and profit growth has been largely thanks to non-operations-related matters (supply-chain efficiencies, and sales of non-core businesses).

Lever, to its credit, has identified new businesses, and got a few of them running. For instance, confectioneries (under the Max brand) have been launched nationally and today bring in Rs 50 crore of revenues, which is no small beer given that the unit size is 25 paise. Similarly, the ayurvedic products launch under the Ayush brand is picking up pace. Banga estimates the herbal and confectionery segments to be worth Rs 4,500 crore, so there's clearly plenty of potential here.

What's more, it's still too early to dismiss the power brands strategy as a failure, going by last quarter's performance. Innovations and market activation resulted in Lifebuoy turning around smartly, with a 30.3 per cent growth over the previous year's corresponding quarter, Fair & Lovely clocking 21.5 per cent, Liril 12.4 per cent, Lux 14.5 per cent and Surf 10.4 per cent. "The power brand strategy is imperative for HLL, but don't expect it show results so quickly," says Mishra of Kotak Securities.

Double-digit growth across the FMCG spectrum may happen only once there's an economic revival, but what must be worrying the HLL top brass is that the competition is slowly but surely chipping away at its marketshare in key categories. At best, Lever can boast that it hasn't lost marketshare (as of May 2002 over June 2001) in the vital personal wash and detergents segments. But the bigger headache is in shampoos, where Lever has lost 4.5 percentage points primarily because it outpriced itself in the satchets segment by increasing prices from Rs 2 to Rs 2.50. Banga is trying to rectify that by rolling back the hike and reducing bottle prices by 25-30 per cent and introducing an "in-between" product at Rs 12. The foods business too has witnessed erosion in marketshares, be it atta, salt, ketchup and vanaspati. The Lever brass, however, points out that the company's objective of profitable growth is being met, what with operating margins in the foods business on the up.

Clearly, HLL needs all the help it can get to rediscover growth, be it from new areas like confectionery or herbal products or the much-awaited branded water launch. Or outsourcing, where the opportunity is huge. But Banga is well aware of the barriers too. For instance, India may boast low costs, but China is proving even more cost-effective because India's labour productivity is pathetic, 70 per cent lower than China's. What's more, Banga has also to clean up the Indian image on the quality, reliability and customer service fronts. Else he could well lose opportunities to other low-cost Unilever bases like Indonesia. If that happens, Banga's exhortations at the last AGM meeting to drive growth via manufactured exports may remain just a speech and little else.

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