"After the initial hiccups, things are in place and HLL has started moving against the current. Our focus on power bands has paid off and put us on a path of growth" M.S. Banga, Chairman, HLL

We are like a boat, moving against the tide," laments a rather sombre Manvinder Singh (Vindi) Banga, Chairman of Rs 10,138-crore Hindustan Lever Limited (HLL), the country's largest fast moving consumer goods (FMCG) company, while announcing a meager 4.3 per cent growth in sales for 2003, its best in three years. The tide he is referring to is the slowdown in the Rs 40,000-crore FMCG sector over the past two years that caught the country's most street-savvy marketer on the wrong foot. "After the initial hiccups, things are in place and HLL has started moving against the current."

For a growth-starved behemoth that once clocked a scorching compounded annual growth rate (CAGR) of 26 per cent-plus from 1993 right till 2000, Banga's exasperation, this apparent clutching-at-the-straws, seems to reflect the growth jinx that has haunted it for more than 12 quarters now. For, just about no one seems to share Banga's conviction on the company's growth prospects-as yet.

The company's stock price fell nearly 10 per cent on the Bombay Stock Exchange in the week it announced its 2003 results. And such is the dismay among analysts on the company's sales growth figures that they routinely expect bad news. "As expected, this year's results were (again) disappointing," says Nirjhar Handa, FMCG analyst with Parag Parikh Financial Advisory Services.

"Our strategy of focussing on power brands has paid off and put us on a path of growth," says a nonplussed Banga. True, the 30-odd power brands have grown 6.5 per cent in 2003, contributing 86 per cent of the company's sales. More efficiency has been wrung out from the supply chain, and sale of non-core, and often loss-making, businesses-such as Dalda, seeds, specialty chemicals, animal feeds, and mushrooms-has kept the profits ticking.

HLL today is more focussed on branded FMCG business, which contributed to 93 per cent of its sales in 2003 as against 74 per cent three years ago. The company, according to Banga, may start looking for acquisitions all over again and get into new segments such as the water business and exit non-core and loss-making businesses such as leather and starch. The moot question, however, is whether the company has enough growth drivers, both in sales and profits?

Getting Squeezed

The 4.3 per cent sales growth for 2003 has been entirely volume-driven with a relatively small part of it coming from price increase. Net profit before exceptional items rose by a mere 4.2 per cent, and after providing for expenses, the growth in bottomline was negligible (Rs 1,771.8 crore). For the quarter ended December 2003, net sales have shown a drop of almost 2 per cent-Rs 2,583 crore versus Rs 2,634 crore for December 2002.

"The only growing segment within HLL is that of Home and Personal Care (HPC). All other segments have recorded a flat to negative growth," says Rajee Lodha, FMCG analyst with Pranav Securities "And even here, the volume growth came at the expense of margins, which declined by 160 basis points in December 2003."

The company had lowered the prices of shampoo and toothpaste products in 2003 in order to push volumes. Ominous signs of eroding pricing power even in categories where the company is able to hold on to its marketshare will only mean that its higher-than-high operating profit margins and net profit will remain under severe pressure. Reason: the pincer attack of nimbler, low-priced brands such as CavinKare, Kanpur Detergents, Anchor Health or Paras Pharmaceutical on the one hand and a born-again, more efficient big competition from the likes of Colgate-Palmolive, Procter & Gamble (P&G), Godrej, Agro Tech and Marico Industries. "We are very happy with the strong volume growth in sachets. They are very profitable," defends D. Sundaram, Director (Finance), HLL.

The complacency may be misplaced. "While competitive pressures from the lower end regional players have stabilised, there is a re-emergence of stronger players such as P&G, Tata Tea and Colgate," says Nikhil Vora, FMCG analyst with Mumbai-based brokerage house SSKI. P&G, for instance, has undercut HLL in detergents and shampoos, starting a price war in the category, forcing HLL to cut prices by nearly 20 per cent. And this when P&G has a mere 5 per cent marketshare.

"We have invested hugely in the quality of our brands through innovation. We are very happy with the strong volume growth in sachets" D. Sundaram, Director (Fin.), HLL

The largest segment at HLL, soaps and detergents, which contributes over 40 per cent of sales, saw not growth but a 0.13 per cent drop in sales in 2003. Beverages, almost 12 per cent of sales, dropped nearly 4 per cent. Even the much-touted processed foods saw a slump in 2003, although after the sale of Dalda, revenues from continuing business in foods saw an increase of 18.47 per cent.

There are signs that the company may drop prices of its key detergent and tea brands to regain volumes. And even make price cuts to larger packs in personal care, such as shampoos. Once again, Banga's oft-repeated strategy of playing the game the HLL way-driving growth and bringing floundering businesses back on track through technology-led innovations and enterprise-wide synergies and not at the cost of profitability-will be tested to the hilt.

Great Expectations

"We are on the path of sustainable growth," asserts Banga. His reasoning: growth in power brands, which has doubled from 3.2 per cent in 2002 to 6.5 per cent in 2003, looks strong; in foods, power brands have grown by 9 per cent after declining in 2002; the prospect of higher disposable income aided by strong economic growth augurs well, particularly the impending rural demand pick-up; and new growth drivers in water and re-launched brands will finally push the growth envelope for the company.

Many analysts, however, condemn the company to a future of slow top-line growth, if at all, even after the market upturn. "Absence of new growth engines will start hurting HLL over the longer term, as incremental consumer demand for FMCGs remains low," adds Vora of SSKI. Analysts reason that none of its five existing new businesses in either confectionery, herbal foray with Lever Ayush, e-tailing with Sangam Direct, self-help groups in Shakti or the year-old direct selling endeavour with Hindustan Lever Network is likely to contribute in any significant manner to either the topline or the bottomline, either this year or next. Banga, however, expects Lever Network and Ayush to join the club of power brands this year, with Lever Network, currently at 2.5 lakh consultants, almost doubling this year. Since there are very few Rs 1,000 crore-plus new businesses to be created overnight, HLL's impending foray into the Rs 1,200-crore packaged water market assumes criticality.

Though no one at HLL will say as much, the company is probably expecting the growth swing to boost its existing bread-and-butter categories. "We have invested hugely in the quality of our brands through innovation," says Sundaram. For instance, last year HLL re-launched Surf Excel, Lux and Brooke Bond. The re-launch process will continue with other brands this year too. "Going forward, we are focussing on driving topline growth for our power brands in HPC and foods," says Banga. The company has lined up a slew of new launches in processed foods this year.

HLL is also banking heavily on an impending pick-up in rural demand. It has revamped its sales organisation for deeper penetration in rural areas. The company has brought all markets with population of below 50,000 under one exclusive sales force, and re-distribution stockists in these markets under the charge of dedicated rural market managers. Part of the rural growth is being targeted through Project Shakti-HLL's self-help groups in villages with population of less than 2,000. HLL will scale up this project in order to cover one lakh villages and 100 million rural consumers by next year.

For all the Lever-skeptics, it is surprising to find analysts who still believe in the HLL story-apart from Lever itself, of course, Handa of Parag Parikh is one of them. "This year should be much better and it is expected to show a double-digit bottomline growth," he says. Adds Harish Zaveri, FMCG analyst with Edelweiss Capital, "We believe that HLL will grow revenues at 9 per cent in 2004 on the back of growth in personal wash and detergents." The backdrop of a strong 8.5 per cent economic growth may be HLL's best chance of turning the tide in its favour.