Turnover net of excise in the first quarter grew a mere 3.36 per cent to Rs 2,440.94 crore, which is way below the revenue growth of 21.3 per cent achieved last year. In contrast, the company's bottomline has swelled 24.21 per cent. The earnings growth was achieved despite a sharp increase of 59.87 per cent in the depreciation and amortisation charge, which stood at Rs 27.85 crore for the first quarter. This obviously is a consequence of investments in the Lakme trademarks and the on-going capex at HLL's factories.

How then has the FMCG major, managed to achieve strong earnings growth despite poor show on revenue front? Analysts address HLL's buoyant bottomline to the company's improved cash flows, stringent working capital control, pro-active management of cash surpluses.

Also, the fact that a majority of HLL's debt is an interest free tax loan, has helped reduce the company's interest burden to a mere Rs 6.86 crore (Rs 9.67 crore last year). Another factor that has helped is other income which has jumped 29.17 per cent to Rs 70.77 crore. Mind you, this is not a one-time affair, but a recurring revenue in the form of dividend from subsidiaries, and dividend income from investments.

A lower effective tax rate down to 23.02 per cent from 26.66 per cent has further helped buoy earnings. This, analysts state, is due to tax breaks from the Pond's merger and backward area benefits. Viewed against the backdrop of economic recession and increasing competitive pressures, the revenue growth seems okay. Interestingly, the volume growth achieved in its main lines of business -- soaps & detergents (10 per cent), ice creams (21 per cent), culinary products (42 per cent growth) and oils & fat (26 per cent), has once again been higher than the market growth.

The dropsy scare, alsobrought about a marked improvements in offtakes in HLL's oils and vanaspatis. Furthermore, despite the increased cost of raw materials and ad-spend on brand building for new categories of ice-creams, culinary products and personal products, operating margins at HLL were buoyant. In fact, operating margins improved from 8.72 per cent to 9.84 per cent.

Given this background and the fact that volumes might stagnate, together with competitive pressures and investments in brand building could put HLL's operating margins under pressure. Additionally, higher agricultural growth last kharif doesn't seem to have materialised into higher rural demand in the first quarter.