| STOCK UPDATE Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,077
Current market price: Rs1,657 Competition pressure intensifies, PT revised to Rs2,077 -
Korean power equipment supplier Doosan and BGR Energy Systems (BGR) have emerged as the lowest bidder (L1) for the supply of supercritical boilers and turbine-generators (TG) respectively for the 7,200MW (9x 800MW) National Thermal Power Corporation (NTPC) power projects. Both the companies are likely to get five units of order in the respective categories. -
Here, Bharat Heavy Electricals Ltd (BHEL) is likely to get Rs6,520 crore worth of orders due to favourable NTPC tendering specifications, provided it matches the L1 quotations. -
Larsen and Toubro (L&T), which emerged as the second lowest bidder (L2) in the TG bid is likely to get two units of order. However, there was unconfirmed news today that L&T has again been disqualified due to non-fulfillment of technical qualifications. This could be positive for BHEL as it might bag these orders. -
Though the competition in the supercritical power equipment space is likely to intensify with more players entering the sector, but BHEL's robust order book (3.6x in Q1FY2012) minimises the need for any aggressive bidding. We also remain positive about its recent initiatives like the ones in the power transmission & distribution sector and the overseas power equipment market, which would help the company in diversifying its business profile and geographies. Nonetheless, the concerns over the competition and the slow industrial capital expenditure cycle along with the hangover of the follow-on public offer have deepened over the last few months. These concerns are reflected in the stock's underperformance with respect to the broad market indices. BHEL'S one-year forward price/earnings (P/E) multiple has fallen from over 20x (enjoyed till FY2010) to 11.2x now. We are revising our target multiple to 14x on FY2013 earnings estimate. Hence, our revised price target stands at Rs2,077. In view of the 25% upside potential, we maintain our Buy call on the stock. Hindustan Unilever
Cluster: Apple Green
Recommendation: Hold
Price target: Under review
Current market price: Rs338 Annual report review Key points -
FY2011 profitability affected by higher raw material cost: During FY2011 Hindustan Unilever Ltd (HUL)'s adjusted (consolidated) bottom line remained almost flat at Rs2,134.4 crore despite a double-digit top line growth of about 11% year on year (YoY) during the year. The bottom line was flat mainly on account of a 243-basis-point year-on-year (Y-o-Y) decline in the operating profit margin (OPM) on account of higher raw material prices. However, the highlight of the fiscal was a 13% sales volume growth in the domestic consumer business achieved on the back of a strong volume growth in the detergent and personal care products segments, which grew by about 20% YoY and 15% YoY respectively during the year. The soap segment's volume grew by 8.5% YoY as against a volume decline of 2.0% YoY seen in FY2010. -
Operating cash flows declined YoY: The net cash generated from the operating activities stood at Rs1,910.2 crore in FY2011 as against Rs3,479.6 crore in FY2010. The decline in the cash generated from operations can largely be attributed to the increase in the commodity prices during the year. Hence, the free cash flows reduced to Rs1,795.8 crore in FY2011 from Rs3,077.6 crore in FY2010. With the expected reduction in the prices of the raw materials and better working capital management, we expect the free cash flows of the company to improve in the coming years. -
Return ratios remained strong: The return ratios remained strong with the return on equity (RoE) and return on capital employed (RoCE) standing at 79.4% and 101.1% respectively in FY2011 as against 87.7% and 103.5% respectively in FY2010. -
Dividend pay-out maintained above 75%: Despite a flat growth in the adjusted profit after tax (PAT) and a single-digit growth in the reported PAT, the company maintained the strong dividend pay-out. Its dividend pay-out ratio stood at 76.9% in FY2011 as against 78.7% in FY2010. -
Outlook and valuation: We expect the volume growth in the personal care business to sustain in high single digits, driven largely by a strong growth in the personal care segment in the coming quarters. Though the gross profit margin is expected to remain under pressure in Q2FY2012, the declining trend of the prices of the key inputs (such as palm oil and other crude derivatives) would help in releasing the pressure on the margins. Thus, we might see a better profitability picture in the second half of FY2012. Overall, we expect the company's net sales and adjusted PAT to grow by 12.5% and 14.5% YoY respectively in FY2012. We shall review our estimates for HUL after the declaration of its Q2FY2012 results. We maintain our Hold recommendation on the stock but due to the stock's rich valuations we keep our price target under review. At the current market price the stock trades at 29.9x its FY2012E earnings per share (EPS) of Rs11.3 and 26.0x its FY2013E EPS of Rs13.0. |
