Date: 11th July 2000
Hindustan Lever Limited. - Growth, thy name is… Goliath?
Current market price - Rs277.7
BSE Sensex - 4898

A young man in a hurry dresses up in the elevator. After he leaves, yet another young man (this time a pipsqueak) enters the elevator followed by a sexy babe. As the perfume of the deodorant lingers on, the babe stops the elevator. Cut to the babe getting out of the lift, straightening her short dress even as the pipsqueak is breathless with suit crumpled, tie askance. Even as he recovers, a succession of people enter the elevator one by one (one leaves and the other enters) and the end result is imaginable. This television commercial gets the message across that the deodorant in use could get you into exceptional circumstances. The product - Axe. The company in question - Hindustan Lever (HLL), which could well be the stock for your grandchildren. Axe is aimed at their generation - not only would they love the product but also the stock.

What is the Business?
A humungous company if ever there was one - that is HLL. It is a veritable monolith of an organization and it encompasses a vast range of products in its portfolio. Ice creams, soaps, detergents, shampoos, creams, men's toiletries, cosmetics, vanaspati, et al. Besides these, the company is also into services like launderette, beauty salons, etc. As the mantle of the Chairman of the company has passed from S M Dutta to K B Dadiseth and now to M S Banga, the vision of the company has been chiseled and focused on customer satisfaction. If HLL's vision translates into performance, then it will further establish the FMCG major's dominance in the Indian consumer's life. Its acquisition of Modern Foods consolidates its hold on the foods business - an area that has been touted as a major growth engine for the company. The parent company's acquisition of International Bestfoods gives HLL a slew of brands in India - brands that are well known and which have strong brand equity.

HLL has been ranked as number one in Forbes magazine, the Far Eastern Economic Review in the "overall leadership" and a "company others try to emulate" category. Brands are what HLL thrives on. Its distribution channel is next to none. HLL's core business comprises of soaps (21.2%), detergents (16.4%), personal products (16.1%), tea (16.6%) and other foods & beverages (12.3%), while the balance 15% is contributed by specialty chemicals, animal feeds business, etc. Most of the brands owned by the company enjoy superior recall value and have been associated with Indians for years now. Lifebuoy, Rin, Vim, Surf, Red Label, Lipton, Bru, Savlon, Kissan, Lakme, Denim, Liril, Rexona, Hamam are some of the brands that we have been seeing, hearing and using for very many years. Besides foods, consumer brands owned by Unilever are to be introduced in India. Backed by the global imagery and inherent brand equity of the products, and put across the visual medium by slick advertising, these brands are expected to get in the thrust for growth.

Who is the Management?
If Moses' was the greatest leader and the Red Sea opened up in front of him, the quality of management at HLL can be compared to him. A fresh-behind-the-ears MBA's best break would be a job opening with HLL. Once the grind is through, he becomes an all rounder in various facets of management - sought after by other FMCG or consumer durable majors. Some of the best managers produced by the "HLL School of Management" have graced the top echelons of the best companies in India and abroad. If ever an award were to be given to the tag of Moses, it will surely be taken by this 51% subsidiary of Anglo-Dutch FMCG major, Unilever plc.

Whither Cash flows?
The company has always had a very shareholder friendly approach. It has been a consistent dividend payer and its outlook towards bonus has also been good. Cash flows and cash management at HLL has consistently been well above par. HLL will continue to take giant strides forward. The growth is despite the company's size, which is gigantic. And boy, are we impressed? The pillars or the wheels on which this impressive performance has been achieved are the business segments of soaps, detergents, personal products, beverages and branded staples. These segments account for close to three-fourth of HLL's turnover. Commodities have recorded a movement into negative territory. Overall, while the topline has grown, the growth has been flat - it has come more by way of volume than by way of value. Downgrading has been happening in the market and most FMCG companies have been affected by it. But, HLL's strategy of having products at all price points has ensured that despite downgrading, it has managed to record good results compared to other FMCG companies. HLL's strong cash position has satiated its hunger for possible acquisitions to enhance its core strength.

Why should I Buy?
Gosh! What a question? HLL continues to focus on doubling the topline every four years. The latest chairman's speech addresses shareholder concerns about sales growth, and whether the company would continue to trim operational and financial costs to improve performance. HLL has zeroed in on six trends which it feels present opportunities to it. From these, it has identified nine growth engines, which could pertain to new product categories or different systems in existing categories to promote growth and improve profitability. These nine growth drivers will take HLL forward in the new millennium. Penetration in the rural markets, leveraging Internet and expanding the basic foods business are some of the growth engines identified. Effectively, HLL would be able to access the lower end of the market via rural penetration as well as capture the top end via the Internet, with the basic foods business driving the growth for years to come. This gameplan will help HLL accelerate new demand at the lower end of the market spectrum and also capture value from shifts in the nature of demand at the upper end.

HLL has access to its parent's R&D, technology and innovation. It has undertaken a massive distribution expansion drive through increasing awareness and penetration of its products (Project Bharat) and to widen the network reach (Operation Streamline). Besides, a direct selling network (Project Nova) is being set up for marketing of personal products. HLL has launched a number of e-commerce initiatives that will bring e-business to the heart of its operations. Beyond 2002, management believes its e-commerce initiative will bring in the next generation of cost control through lower investments in supply chain. Wow! Now that is what we call convergence in the real sense. Leveraging the Internet to get the old economy and the new one together.

Where can I go Wrong?
Much as we would like to say that there isn't any negative in HLL, a few concerns do exist. As mentioned earlier, due to intense competition and slow down in the demand for FMCGs, HLL's margins could come under strain. Its portfolio seems to be going through a structural shift with high growth products moving to the mature category. Although HLL has been making investments, there will be a time lag for new products to move in the star category. This, in other words, means that margins would be under pressure in coming years. The parent's decision to charge a royalty of 1% on a part of the turnover will also affect the bottomline of the company. Some of the sunrise categories that the company has been banking on have failed to take off. Categories like ice cream, culinary products and coffee constitute only 5% and are stagnating despite the company's efforts to make them grow. Although there have been no indications other than a couple of separate joint ventures, there is a fear that the parent company may set up a 100% subsidiary in India to pursue future business opportunities.

Murali Iyer

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