Aggressive pricing and higher investment have helped Hindustan Lever defend its market position against the onslaught of competition in conventional businesses such as laundry and shampoos over 2004. But HLL will continue to lean heavily on these businesses for its sales and profit growth, in the foreseeable future.
But HLL will continue to lean heavily on these businesses for its sales and profit growth, in the foreseeable future. The slew of restructuring and exit costs taken by HLL in the December quarter are a signal that a good number of its new business forays are yet to click in the marketplace.
Significant volume and value growth in the laundry business and market share gains in laundry, personal care, toothpastes and beverages are the key positive highlights to HLL's latest numbers. They show that HLL has, for now, successfully warded off price wars and regional competition.
This, however, has extracted a price on profitability, with net profits shrinking by 33.6 per cent on a comparable basis for 2004. HLL is likely to continue with its strategy of driving volume sales, which means that profit growth is likely to be sluggish.
This quarter, HLL has made a decision to exit the confectionery business, taken a write-off on the Modern Foods business, withdrawn some innovations made only last year in processed foods and admitted that the progress of Ayush is not up to expectation. The foods business has continued to de-grow impacted by "product rationalisation".
The water and the salon businesses are still in nascent stages. This indicates that HLL will, for now, have to depend on new channels of distribution to try and step up consumption levels for its cash cows - the home and personal care businesses. This could be a slow process, with HLL having to fight off competitors every step of the way.
However, there are a few factors that point to better numbers from HLL over the coming fiscal. For one, since HLL effected the deep price cuts on laundry last March, the sharp profit decline arising from the base effect, may wear off after the March 2005 quarter.
Second, improving market growth rates in categories such as shampoos, toothpaste and personal wash will also begin to show on HLL's numbers. The recent price increases on laundry brands will also help to a small extent. Third, with the rationalisation of its foods business complete, foods may prove to be less of a drag on growth. The redemption of bonus debentures in end-2004 will also reduce the interest outgo and pep up net profit growth for HLL in 2005.
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