| Summary of Contents
| STOCK UPDATE Hindustan Unilever
Cluster: Apple Green
Recommendation: Hold
Price target: Under review
Current market price: Rs387 Q3FY2012 results: First-cut analysis Result highlights -
Hindustan Unilever Ltd (HUL)'s Q3FY2012 results have come ahead of our as well as the Street's expectations largely on account of a better than expected operating performance during the quarter. The volume growth momentum in the domestic consumer business sustained at high single digit with a 9.1% year on year (YoY) growth during the quarter (as against a 9.8% YoY volume growth in Q2FY2012). -
Net sales grew by 16.4% YoY to Rs5,852.7 crore (largely in line with our expectation of Rs5,897.3 crore) in Q3FY2012. The growth was driven by an 18% YoY growth in the home and personal care (HPC) business (which contributes more than 75% to the total revenue) and a 12.0% YoY growth in the foods
business . -
The strong growth in the HPC business can be attributed to an approximately 21% YoY growth in the soaps and detergents segment revenues and around 14% YoY growth in the personal products business. We believe an above 21% YoY growth in the soaps and detergents business can be attributed to price increases undertaken in the portfolio, while the growth in the revenues of the personal products business has been largely volume driven. The profit before interest and tax (PBIT) margins of soap and detergents segment improved by 573bps YoY to 13.5% during the quarter. However the PBIT margins in the personal products segment declined by 294bps YoY to 25.9%, which is a kind of a disappointer for the quarter. -
The foods business also posted a steady performance with the beverage segment growing by 11.3% YoY and the packaged foods segment expanding by 13.5% YoY during the quarter. The beverage segment's PBIT margin was down by 115bps to 15.7% largely on account of higher coffee prices. The losses in the packaged food segment declined by 63.0% YoY to Rs6.0 crore. -
The higher raw material prices continued to put pressure on the gross profit margin (GPM) of the company. The GPM contracted by 143bps YoY to 47.5% in Q3FY2012. However the GPM improved sequentially by 181bps. -
Despite a decline in the gross margins, the operating profit margin (OPM) improved by 271bps YoY to 15.1%, largely on account of lower advertisement spends (as a percentage of sales) and other expenses (as a percentage of sales) on a Y-o-Y basis. The ad-spends as a percentage to sales were at 11.8% in Q3FY2012 as against 14.8% in Q3FY2011. Thus the operating profit grew by 41.9% YoY to Rs885.6 crore. -
However a lower other income Y-o-Y and a higher incidence of tax resulted in a 30.3% YoY growth in the adjusted profit after tax (PAT) to Rs763.5 crore for the quarter. The post tax exceptional loss stood at Rs9.7 crore against an exceptional gain of Rs51.5 crore in the corresponding quarter of the previous year. Hence the reported PAT grew by 18.2% YoY to Rs753.8 crore during the quarter. It was yet another quarter of strong operating performance for HUL with volume growth in the domestic consumer business standing in higher single digits. The sequential improvement in the gross margins was the highlight of the quarter. We will review our estimates for FY2012E and FY2013E post the conference call tomorrow. The stock is currently trading at 28.6x its FY2013E earnings per share (EPS) of Rs13.5 (ahead of mean PEx of 26x). We maintain our Hold recommendation on the stock. GlaxoSmithKline Consumer Healthcare
Cluster: Evergreen
Recommendation: Buy
Price target: Rs3,000
Current market price: Rs2,637 PAT largely in line with expectations Result highlights -
Q4CY2011 performance snapshot: The net sales grew by 18.6% YoY during the quarter with the overall volume growth standing at 11% YoY. The price-led growth during the quarter stood at 8% YoY. The raw material cost inflation for the quarter stood at 13%. However the price hikes in the portfolio aided in mitigating cost pressure and hence the gross margins stood almost flat at 64.4% (down by 44bps YoY). However a substantial increase in ad-spends and other expenses resulted in operating margins declining by 127bps YoY to 10.2%. Hence the operating profit grew by just 5.5% YoY to Rs61.6 crore. However a 33.3% YoY growth in the business auxiliary income and a 37.5% YoY growth in the interest resulted in a 21.2% YoY growth in the profit before tax (PBT). The adjusted profit after tax (PAT) grew by 23.0% YoY to Rs66.0 crore (excluding the prior period tax adjustment of Rs6.9 crore), which is largely in-line with our expectation of Rs63 crore for the quarter. -
MFD segment registered double digit volume growth: The malted food drinks (MFD) segment (contributes close to 94% to the top line) registered a volume growth of 12% YoY during the quarter. The same was driven by a 16% YoY volume growth in the company's flagship brand - Horlicks. The brand's volume growth improved on a Q-o-Q basis from 10% YoY in Q3CY2011 to 16% in Q4CY2011. Boost's sales volume grew by just 2% YoY in Q4CY2011. This flat growth can largely be attributed to a high base of Q4CY2010 (volume growth of 25% YoY). The value growth in Horlicks and Boost stood at approximately 23% YoY (price-led growth of 7%) and an approximately 10% YoY growth (price-led growth of 8%) during the quarter. With food inflation likely to soften in the near term, we expect the volume growth for the MFD segment to stand in the range of 10-12% in the coming quarters. -
Performance of non-MFD segment: The biscuit segment (contributes close to 5%) registered a value growth of 29% YoY (with volume growth standing at 15% YoY) during the quarter. The recently launched Horlicks Oats got a good response in the southern market and is now the number two brand in Tamil Nadu and Kerala. Outlook and valuation
We have broadly maintained our earnings estimates for CY2012 and CY2013. We expect GSK Consumers' top line to grow at a compounded annual growth rate (CAGR) of 20% over CY2011-13E with sales volume growth standing in the range of 10-12% over the same period. With the operating margins likely to position in the range of 16-17%, we expect the bottom line to grow at a CAGR of 20% over the same period.
We like GSK Consumer largely on account of its market leadership positioning in the lowly penetrated MFD segment, strong balance sheet with cash of more than Rs1,000 crore and its good dividend payout policy. We maintain our Buy recommendation on the stock with a price target of Rs3,000. At the current market price the stock is trading at 25.8x its CY2012E earnings per share (EPS) of Rs102.0 and 21.7x its CY2013E EPS of Rs121.7. India Cements
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs105
Current market price: Rs94 Price target revised to Rs105 Result highlights -
Earnings ahead of estimates: India Cements in its Q3FY2012 results delivered an impressive performance and posted a 177.4% year-on-year (Y-o-Y) growth in its adjusted net profit. The adjusted net profit for the quarter stood at Rs56 crore which is well ahead of our as well as the Street's estimates largely on account of better than expected operating profit margin (OPM) and much lower than expected effective tax rate. -
Revenue growth driven by healthy realisation and volume growth: The net sales of the company grew by 20.6% YoY to Rs941.5 crore (much in line with our estimates). The net sales also include revenues from the Indian Premier League (IPL) franchise, wind power and shipping businesses. The revenue from the cement division (which is its core business) has improved by 24% YoY to Rs926.7 crore. The same was driven by a 15.7% growth in the average cement realisation due to supply discipline followed by cement companies in south India. On the other hand the southern region has witnessed partial recovery in the cement offtake and hence the volume grew 7.1% on a Y-o-Y basis. However, the revenue from the IPL franchise declined to Rs4 crore as against Rs21 crore in the corresponding quarter of the previous year. The shipping division has booked a revenue of Rs10 crore during the quarter. -
Margin expansion led by surge in realisation; cost pressure continues: On the margin front the OPM expanded by 450 basis points (bps) YoY to 20.7%. The margin expansion is due to a 15.7% increase in realisations to Rs4,241 per tonne. However, on the other hand the cost pressure continued to play its role with a) the raw material cost (blended basis) increasing by 41.3% on a per tonne basis, b) power & fuel cost increasing by 7.2% on a per tonne basis and c) employee cost increasing by 12.6% YoY to Rs70.8 crore. Hence the overall cost of production on a per tonne basis has increased by 5.3% on a YoY basis. However, with a healthy growth in the average realisation, the blended EBITDA per tonne has increased by 89% YoY to Rs861. Consequently, the operating profit of the company has increased by 54.1% YoY to Rs194.6 crore. -
Surge in interest cost due to increased borrowings & forex charges: The interest cost during the quarter increased by 84.4% YoY to Rs75 crore on account of increase in borrowings at a higher rate to redeem the outstanding foreign currency convertible bonds (FCCBs) and to meet working capital requirements. The total borrowings of the company currently stood at Rs2,900 crore as compared to Rs2,456 crore at the end of FY2011. The interest cost of Rs75 crore also includes foreign exchange (forex) translation charges on the forex loans to the tune of Rs15.6 crore. -
Lower than expected effective tax rate supports earnings growth: The effective tax rate during the quarter worked out to just 9.2% as compared to 35% in the corresponding quarter of the previous year. We had factored a 33% tax rate in our estimates. The lower than expected effective tax rate during the quarter is on account of tax paid on redemption of FCCBs amounting to Rs177.9 crore which has been adjusted against Securities Premium Account. -
Captive power plant for 50MW commissioned in Jan 2012: A power plant of 50MW capacity at Sankar, Tamil Nadu for captive requirement has been commissioned during the month of January 2012 and the trial runs of the plant have been undertaken. Hence the positive impact in terms of regular power supply and cost savings will reflect in FY2013. Further the work on the development of its coal mine in Indonesia has been delayed and is now expected to be completed during Q4FY2012. -
Upgrading estimates for FY2012 & FY2013: We are incorporating better than expected average realisations. Further we also factor a marginal cut in the volume estimates for FY2012. Overall we are upgrading our earnings estimates for FY2012 and FY2013 and the revised earnings per share (EPS) now stands at Rs9.7 and Rs11.9 respectively. -
Maintains Hold with revised price target of Rs105: The cement demand in India Cements' key market area (the southern region of India) has witnessed a sign of partial recovery driven by private sector housing and rural demand. Hence going ahead we expect the volume growth to support revenue growth. On the realisation front, the supply discipline mechanism has worked well and realisation in the southern region stood at a healthy level. However, in order to deliver higher volume the realisation could come under pressure. Further cost pressure in terms of higher imported coal price and freight cost through increase in lead distance will partially offset the positive impact of increase in realisation. Hence we maintain our Hold recommendation on the stock with a revised price target of Rs105 (valued at enterprise value [EV]/tonne of $65). At the current market price the stock trades at a price earning (PE) of 8x discounting the EPS for FY2013E and EV/EBITDA of 4.5x its FY2013E earnings.
SHAREKHAN SPECIAL Q3FY2012 IT earnings review Key points -
Rupee led growth in a seasonally soft quarter: The performance of the top four IT companies remained broadly in line with our as well as the Street's estimates for the seasonally soft December 2011 quarter. However, there was some moderation seen in volume growth adjusted for seasonal weakness. The aggregate sequential revenue growth in USD terms was at 2.6% for the December quarter, impacted by cross currency headwinds. However on a constant currency basis the revenue growth was more decent at 4.3%. Nevertheless, a steep rupee depreciation of 9.7% during the quarter helped the companies to report fascinating numbers in rupee terms. The favourable rupee has also translated into strong margin performance during the quarter. The quarter saw some strong deals signing with Infosys and TCS bagging five and ten large deals respectively while HCL Technologies (HCL Tech) reported cumulative deal signings worth $1 billion. However, the management commentary of the leading companies in the sector has seen some tear down in optimism on the back of the macro-economic headwinds. Most of the companies' managements indicated at facing delays in decision making in some projects and also softness in the discretionary spends. With expectations of IT budgets for CY2012 remaining flat to marginally down, there was unanimous optimism about increase in offshore IT budgets. -
Volume growth moderation owing to seasonal weakness: Seasonally, the December quarter has always been a soft quarter in terms of volume growth owing to lower billing days and planned shutdowns by clients. The quarter saw moderation in volume growth; the average volume of the top four IT companies grew by a modest 3% sequentially as against a 5.5% growth in the September 2011 quarter. Incidentally the sequential volume growth for the December 2011 quarter was the lowest in the last five years (the average being 4.5% in the last five years). TCS, Infosys and HCL Tech's volume growth was below expectations; Wipro disappointed the most posting just a 1.8% quarter-on-quarter (Q-o-Q) volume growth. On the positive side, there was a pricing uptick of 40-200bps in the quarter on a constant-currency basis for the top four IT companies. Overall, a modest volume growth coupled with the adverse impact of cross currency headwinds (150-200bps) led to a soft 2.6% sequential aggregate revenue growth for the quarter. -
Margins benefited primarily led by rupee: For the December 2011 quarter, most of the companies have reported an improvement in their operating margins, primarily led by a favourable rupee. Infosys has led the pack with a 265bps improvement and Wipro has shown the least improvement (93bps) among the top four. On the other hand, an improvement in pricing (led by a change in the mix and a higher proportion of fixed price projects) has also contributed to the improvement, though employee utilisation saw a decline. Going forward, we expect margins to remain in a narrow band (internal levers like utilisation could pick up in the coming quarters). However a further strengthening of the rupee could adversely impact margin performance from the current levels. -
Valuation: In the last one month (since January 6, 2012), the BSE IT Index (up 1%) has underperformed the Sensex (up 11.4% for the commensurate period) after a smart outperformance in the preceding three months. Going forward, with external levers (rupee benefits) showing sign of fading, the internal variables (volume, price and productivity) need to gear up to sustain earnings momentum in the coming quarters. With the Street's earnings expectations for FY2013E still at a modest level, any surprises in the form of an improvement in the global macro environment would translate into a better stock performance in the coming months. We continue to remain cautiously positive on the sector over a 12-month horizon. However, we like TCS and HCL Tech as our top picks among the large-cap IT companies and NIIT Technologies (NIIT Tech) and Polaris Financial Technology (Polaris) are our preferred bets in the mid-cap space.. | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article. | |
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