Shelf-Sultan: Its share of shoping carts ensures HLL stays at #1, but growth remains elusive
1 RANK	MVA: 35,462 EVA: 1,003 MVA and EVA in Rs crore

Sundaram and almost every Unilever employee for that matter would be knowing a thing or two about wealth creation. The Anglo-Dutch foods and soaps giant has for close to a decade now been implementing its homegrown system of performance measurement. Dubbed Trading Contribution Measure (TCM), it isn't much different from EVA: The focus is on profit generation taking into account the cost of capital, and making each one at HLL accountable in the decision-making. Whether it's a board-level decision regarding an acquisition or a rationalisation, or something relatively innocuous as procurement of a non-production item (NPI in Lever-speak) like PCs, the guiding principle is the same: That decision should result in value-creation. That's perhaps why Unilever's India operations top the BT-Stern Stewart rankings on both the EVA and MVA fronts. The stress on TCM could also explain why Hindustan Lever Ltd (HLL) has been able to quadruple EVA over five years and almost double it over the past three. "We are committed to delivering intrinsic value to shareholders, which is reflected in all our actions, be it chasing quality growth or improving the topline mix or our supply chain initiatives or leveraging technology to reduce costs," explains M.S. Banga, Chairman, HLL.

All that sounds impressive, and probably even is. But then, as any HLL shareholder will tell you, India's premier wealth creator is stuck in a swamp of a slowdown. In the home and personal care (HPC) segment for instance, industry growth has actually declined last year, although Lever did manage to buck that trend. In foods, HLL has been pulling out all stops to make it profitable. In 2002, gross margins in foods did go up 5 per cent, but that came at the cost of a 10 per cent dip in top line growth. Ice creams continues to lose money, although Banga has set a 12-18 month timeframe for breakeven. The net effect of sluggish markets, coupled with pincer attacks from low-priced competition across categories, is a topline that refuses to budge upwards, and turnover last year dropped 6.7 per cent (net of excise).

Indeed, for over two years now, HLL has been grappling, on the face of it unsuccessfully, with poor demand conditions. And that's reflected in the decline in its MVA-by Rs 8,758 crore over the previous year, and by Rs 17,162 crore over the past five years. The price-earnings multiple has crashed from 60 levels in 1999 to under 20 currently, although it must be said that the HLL stock's performance is still much better than the overall market over that period. The key question then, which HLL has to answer: Is the company a victim of unrealistic investor expectations, or is something wrong with HLL's fundamental performance?

The Quiet Topline

The consistent increase in EVA over the years could be taken as one surefire indicator that all's well on the performance front. Yet, if you look at how HLL has been delivering the goods, it's been primarily thanks to cost-reduction and supply chain initiatives, a string of divestments of non-core businesses and a tight rein on investments. There's one crucial contributor to EVA that isn't quite kicking in: the topline.

M.S. Banga, Chairman, Hindustan Lever Limited: The topline should worry him

Banga admits that he's not satisfied with current levels of revenue growth, but in the same breath he'll tell you that it's only quality growth that he's interested in-not growth just for the heck of it. That's why last year he was willing to get rid of roughly Rs 500 crore by stopping non-core exports even though it wouldn't do his top line any good. He's also re-jigging the portfolio, innovating, and upgrading quality of products and advertising. For instance, a new-mix, new-fragrance Lifebuoy, on a new ad platform of germ-protection and positioned as a family health soap helped revive the brand's flagging fortunes. Similarly Lux was able to post double-digit growth, and both Lux and Liril have been extended into body wash, opening up a new premium segment. The progress of these brands was largely responsible for the HPC division being able to pitch in with Rs 220 crore of incremental sales last year-which is easily more than the total HPC sales of most FMCG companies.

That's why Sundaram points out that percentage growth numbers can be misleading in hll's case- at least when it comes to EVA-courtesy its sheer size. For, EVA is not about percentages but is an absolute growth number-and that's the number shareholders should be concerned with because it's that figure that takes care of their returns. For good measure, the Finance Director adds that HLL's earnings before interest and tax could easily be three times that of many FMCG companies.

Value Forever

The topline might have its role to play, but then value-creation isn't about turnover only. Costs and investments have their role to play too, and perhaps a larger role when demand conditions are poor. Indeed, if there are analysts out there who are wondering for how long Hindustan Lever can keep squeezing out inefficiencies on the cost and supply chain fronts, Sundaram will surely convince them that it's a never-ending exercise. "Cost-management (he prefers that term to cost-cutting) is not a cul-de-sac. Every change results in a state of obsolescence, which breeds hidden costs." It's tough to disagree after seeing the initiatives HLL has made on the cost front. On the media front, it's gaining huge efficiencies by consolidating its hitherto-fragmented buying with one agency. In packaging, HLL is saving all of Rs 1,000 crore by opting for a team-based approach when buying and developing plastics and paper. Managers from different categories come together to procure their packaging needs, thereby enabling them to negotiate better with vendors. At budget meetings, targets for cost savings are identified, be it in materials or packaging or transportation. For example, details such as identifying the ports that are more conducive for bringing in certain materials have also been thrashed out.

The quest for efficiencies hasn't ended on the working capital front, either. By leveraging technology, HLL today is connected to 80 per cent of its stockists, allowing the company to know their selling patterns, and ensure that the right stock is in the right place. End result: sales aren't lost. Fixed assets are also strictly monitored. Capex approvals don't come easy, critical expenditure is evaluated taking into account future cash flows, and post-expenditure evaluations are also carried out.

Clearly, as long as HLL can keep raising the efficiency bar, it can keep adding that much more value by growing the bottomline (profits after tax grew 11.3 per cent last year). For the topline to kick in, HPC has to keep improving growth, foods and ice creams have to begin kicking in, and the new businesses (the Ayush herbal range, confectioneries, and the recently-revamped network marketing thrust) have to scale up. That's going to take its time. There may be some investors who won't be willing to wait that long. Those who keep the faith will also be keeping in mind that India's largest wealth creator didn't earn that sobriquet just like that.