MUMBAI, February 12: Mundane money feeds the Levers merger mania. As Hindustan Levers brought yet another Levers subsidiary into its fold, and closest yet to being finally out of rivals' reach, behind the consumer products giant's moves was the harvest of one of its most successful ever treasury seasons.The result of the treasury manouevres was a bulging cash chest, which obviated the need, when shelling out Rs 130 crore to buy out the country's largest cosmetics business, of second thoughts. The net gain from treasury alone in 1997 was Rs 73 crore.
Last year, HLL had made a net loss in treasury operations of Rs 25 crore. This year, not only was that amount recovered, but a further profit of Rs 48 crore ensured the timely cash boost. There were three elements to Levers' cash generation strategy, which left it with the necessary surplus for new assets: first, high operational efficiency which, even after investing a whopping Rs 200 crore in new fixed assets, left a surplus, second, a highly unusualnegative working capital situation in the main businesses sharply cutting interest cost, and third, cautious investment of the surplus funds thus generated in government securities and other money market instruments.
"The government securities market offered us an excellent opportunity to deploy the surplus cash we generated, and get near-zero risk returns,", said a senior HLL director in an informal chat.
"We wrenched every extra bit of return out of every asset," said Keki Dadiseth, Hindustan Levers chairman, "without raising prices at higher than the inflation rate, we managed to generate cash accruals. And our investments were low-risk, even " The increased efficiency was reflected in a minute 4.9 per cent rise in depreciation.
A striking feature of this aspect of Levers' operation was a "negative working capital situation", which essentially means that Levers operated with as low stocks as possible, sharing in some cases the onus with distributors, but in most cases, through the use of advancedinformation technology, keeping better tabs on demand. The personal products business in particular benefited from the credit manouevre. The result: a stunning 40.5 per cent drop in interest cost, from Rs 57 crore to Rs 33.9 crore. HLL also rationalised inefficient assets, eliminating profit leaks.
The final achievement, of course, was the successful deployment of the funds thus generated, which reversed the 1996 loss on treasury to a 1997 profit. Gilts, treasury bills and other money market instruments, and a correct reading of the likely slope of the interest rate gradient combined to build Levers' financial muscle.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
