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STOCK UPDATE Hindustan Unilever
Cluster: Apple Green
Recommendation: Reduce
Price target: Rs520
Current market price: Rs552 Downgraded to Reduce Result highlights -
Results in line with expectations, volume growth disappoints the Street: Hindustan Unilever Ltd (HUL)'s Q2FY2013 results are ahead of our expectations largely on account of a higher than expected other income (including the other income from operations) during the quarter. The adjusted profit after tax (PAT) grew by 23.1% year on year (YoY) to Rs805.3 crore, ahead of our expectation of Rs776.8 crore. The volume of the domestic consumer business grew by 7% YoY in the quarter, lower than the 9% growth in Q1FY2013 and the Street's expectation of a 9-10% growth. The soap and detergent segment's performance was the highlight of the quarter with the segment's revenues growing by 22.3% YoY and profit before interest and tax (PBIT) margin improving by 191 basis points YoY to 14.3%. On the other hand, the personal product segment has sprung a negative surprise with just a 12.1% year-on-year (Y-o-Y) revenue growth and a 125-basis-point Y-o-Y decline in the PBIT margin to 24.2%. -
Performance snapshot: In Q2FY2013, HUL's net sales grew by 11.6% YoY to Rs6,155.4 crore, largely in line with our expectation of Rs6,207.1 crore. Benign raw material prices, effective buying of the key inputs and judicious price hikes in the product portfolio aided the gross profit margin (GPM) to improve by 143 basis points YoY to 46.9%. However, the company increased the advertisement spending because of heightened competition in most of its key segments. The advertisement spends as a percentage of sales increased by 68 basis points YoY to 12.5% and the other expenses as a percentage of sales increased by 52 basis points YoY to 15.7% in Q2FY2013. Hence, the operating profit margin (OPM) stood flat at 13.3% during the quarter. The operating profit grew by 12.1% YoY to Rs821.1 crore. However, an 83% Y-o-Y growth in the other income to Rs148.8 crore (including the investment income and a gain on the sale of non-current investments) and a 65% Y-o-Y growth in the other operational income to Rs155.4 crore led to a 23.1% Y-o-Y growth in the adjusted PAT to Rs805.3 crore. -
Revision in estimates: We have marginally lowered our earnings estimates by 1% and 2% for FY2013 and FY2014 respectively to factor in the lower than expected revenue growth in the personal product and processed food businesses in Q2FY13. We have introduced our FY2015 earnings estimates for the company in this note. -
Outlook and valuation: The moderation in the volume growth in Q2FY2013 indicates that the sustained inflationary environment and heightened competition are giving a tough time to HUL's key segments. However, the company is aiming to improve the volume growth by increasing the media and promotional spending, enhancing the distribution reach and innovating & renovating its product portfolio in the coming quarters. The decline in the prices of the key inputs (including palm oil) would aid in improving the GPM in the coming quarters. However, an increased advertisement and media spending would keep the OPM in the range of 13.5-14.0% in the coming quarters.
At the current market price the stock is trading at 31.8x its FY2014E earnings per share (EPS) of Rs17.4, which is 22% higher than the average multiple of 26x of the last four years. Hence, in view of the premium valuation and the concern over the volume growth, we downgrade our recommendation on the stock from Hold to Reduce with a revised price target of Rs520 (we roll over the target to 28x its average FY2014-15 earnings). ICICI Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,230
Current market price: Rs1,078 Price target revised to Rs1,230 Result highlights -
ICICI Bank's Q2FY2012 results were ahead of our estimates as the net profits grew by 30.1% year on year (YoY) to Rs1,956 crore. The growth in profits was mainly driven by a strong growth in the net interest income (NII), which grew by 34.5% YoY to Rs3,371 crore (higher than our estimates). -
The net interest margins (NIMs) remained stable on a quarter-on-quarter (Q-o-Q) basis at 3.0% as a decline in the overseas' NIMs was compensated by an improvement in the domestic NIMs (3.43% vs 3.32% in Q1FY2013). -
The business growth continued to remain strong as advances grew by 17.6% YoY, while deposits grew by 14.8% YoY. The current account savings account (CASA) ratio was 40.7% vs 40.6% in Q1FY2013. -
The asset quality remained stable as the gross and net non-performing assets (NPAs) were almost similar to Q1FY2013 levels. The bank has provided ~85% for its exposure towards Deccan Chronicle, which turns into NPA in Q2FY2013. The outstanding restructured loans were almost unchanged at Rs4,158 crore. -
The non-interest income grew by 17.4% YoY mainly driven by the treasury income of Rs172 crore. The fee income growth remained flat on a year-on-year (Y-o-Y) basis due to a slowdown in the corporate fees. Valuation: ICICI Bank has yet again delivered a robust performance on all fronts. Therefore, we have raised our estimates on an average by 3-5 % for FY2013 and FY2014 and expect the earnings to grow at a compounded annual growth rate (CAGR) of 15.7% over FY2012-14. We also revise our sum-of-the-part (SOTP)-based target price upwards for ICICI Bank to Rs1,230 (valuing the stand-alone bank at 1.6x FY2014 book value). We maintain Buy rating on the stock. Punjab National Bank
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs800
Current market price: Rs749 Price target revised to Rs800 Result highlights -
Punjab National Bank (PNB)'s Q2FY2013 results were disappointing as the net profits declined by 11.6% year on year (YoY) to Rs1,065.6 crore (below our estimate). This was on account of a tepid growth in the net interest income (NII) and a sharp rise in the provision (51.2% YoY). -
The net interest margin (NIM) declined by 10 basis points quarter on quarter (QoQ) to 3.5% in Q2FY2013 from 3.6% in Q1FY2013, mainly due to a 43-basis- point quarter-on-quarter (Q-o-Q) decline in the yield on advances. Further, there was also an interest reversal of Rs163 crore, which affected the NII and NIMs. -
The business growth appeared to be steady on a year-on-year (Y-o-Y) basis but was muted on a sequential basis. The advances grew by 22.8% YoY (up 0.1% QoQ), whereas the deposits grew by 17.3% YoY (up 4.0% QoQ). The current account savings account (CASA) ratio increased to 35.8% from 34.6% in Q1FY2013. -
The key disappointment came from the asset quality front as the slippages shored up to Rs4,544 crore, leading to the gross non-performing assets (NPAs) inching to 4.66%.The bank also restructured Rs2,677 crore of advances in Q2FY2013, thereby increasing the restructured book to 9.5% of the advances. -
The non-interest income growth was also sluggish as it grew by a mere 1.9% YoY but declined by 22.4% on a Q-o-Q basis. The fee income grew by 1.1%, whereas the foreign exchange income fell to Rs127 crore in Q2FY2013 from Rs212 crore in Q1FY2013. Valuation
PNB's Q2FY2013 result points to a significant pressure on the asset quality, which is beginning to erode the core income growth. Therefore, we revise the earnings estimates downwards, factoring the asset quality concerns, and expect the earnings to grow at a compounded annual growth rate (CAGR) of 6.3% over FY2012-14. We revise the target price to Rs800 (1.05x FY2014 adjusted book value). We downgrade the recommendation from Buy to Hold. Bajaj Holdings & Investment
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,236
Current market price: Rs853 Price target revised to Rs1,236 Result highlights -
The consolidated income of Bajaj Holdings and Investment Ltd (BHIL) remained flat at Rs91 crore on a year-on-year (Y-o-Y) basis. During the last seven quarters, the company reported a lacklustre top line of under Rs100 crore but the top line improved sequentially by 25.7% in Q2FY2013. -
However, the income from the company's associates improved by 8.4% year on year (YoY) in the same quarter. This led to a 7.4% Y-o-Y increase in the profit after tax (PAT) to Rs390.5 crore. -
During Q2FY2013, the total market value of the company's investments grew by 16.5% sequentially, whereas the cost of investments was up by 2.8% due to an increased exposure in the fixed income securities and other equity investments. -
The market value of its equity investments in the core associate companies (80% contribution) grew by 18.8% sequentially, while the market value in the other equity investments increased by 8.8% quarter on quarter (QoQ). -
BHIL invested Rs368 crore towards its entitlement in rights issue of Bajaj FinServ (BFS) on October 8, 2012, which would be reflected in Q3FY2012. Valuation
BHIL's key investment, Bajaj Auto, has been valued at 13x FY2014 earnings per share (EPS). Though Bajaj Auto reported quarterly results in line with our expectations but there are concerns over increasing competitive intensity from Honda Motorcycle & Scooter India (Honda). Our price target for Bajaj FinServ is based on the sum-of-the-parts (SOTP) valuation method. Given the strategic nature of BHIL's investments (namely Bajaj Auto and Bajaj FinServ), we have given a holding company discount of 50% to BHIL's equity investments. The liquid investments have been valued at cost. Our price target of Rs1,236 implies a 45% upside for the stock. We maintain our Buy recommendation on BHIL.
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