FMCG major Hindustan Lever (HLL) is expected to turn in spiffy numbers for the quarter ended March '06. Analysts say the company has benefited from volume growth, price hikes, stronger growth in high-margin brands, margin expansion and a fall in effective tax rates, due to higher sales from backward areas that offer fiscal benefits.
Both Merrill Lynch and ICICI Securities have projected a 40%-plus net profit growth for Lever in the first quarter of this calendar year. It is also estimated that HLL will show an improvement in operating profit margins for the first time in 10 quarters.
These projections do not take into account income from exceptional items. The 40% growth projections are a bit exaggerated due to low base effect. HLL had delivered its lowest recurring profit in the past 26 quarters in the corresponding quarter of last year. Not all analysts agree with the 40% growth projections; some believe profit growth will be modest.
Topline growth is also likely to be robust, with analysts pegging net sales growth of HLL at 13-16%. HLL had been hit by slowdown in FMCG sector and the P&G price war. But it has been on a recovery path in the past couple of quarters and its scrip, which hit a 52-week low of Rs 126 last April, is now trading at Rs 273.
While HLL has hiked market share in soaps in January-February, it lost market share in detergents, toothpastes, shampoos and skin-care products. But the aggregate growth in these categories has enabled HLL to register overall sales growth. Analysts say it has benefited from growth in high-margin brands like Lux and Lakme. Merrill Lynch has forecast a 12% sales growth in soaps and detergents, and 35% growth in personal products.
Over the past six months, HLL has hiked prices of its key segments including skin-care, premium detergents and Lifebuoy. During February and March '06, the price of Surf packs of 750 gm and 1 kg was hiked by 3-5%, while that of a 4 kg pack rose by 25%.
It is estimated that if the price hikes of '05 are taken into account, on an average, detergent prices have risen by 12%, against 25-30% price cut in '04. Lifebuoy's price has risen by 10-15%. “Price hikes in segments in which HLL dominates will lead to an improvement in profitability,” says an ICICI report.
Margin expansion is being assisted by higher sourcing from backward areas. Merrill Lynch has projected an effective tax rate of 19% for HLL in Q1 against 21% in the year-ago period, as it believes higher sales are coming from backward areas which offer fiscal benefits.