| Summary of Contents
| STOCK UPDATE Hindustan Unilever
Cluster: Apple Green
Recommendation: Hold
Price target: Under review
Current market price: Rs443 Q1FY2013 results: First-cut analysis Result highlights -
Results ahead of expectations; driven by robust performance of HPC business and higher other income: Hindustan Unilever Ltd (HUL)'s Q1FY2013 results are ahead of our as well as the Street's expectations. The impressive numbers were achieved on the back of the price hike-led strong performance of the home and personal care (HPC) segment (soaps, detergents and personal products) and a surge in the other income during the quarter. The consumer business recorded a volume growth of 9%, which was largely in line with the 10% volume growth in Q4FY2012. -
Revenues grow by 13.6%, in line with expectations: HUL's Q1FY2013 results are not strictly comparable on a year-on-year (Y-o-Y) basis due to the demerger of its export business. The net sales grew by 13.6% year on year (YoY) to Rs6,250.2 crore, exactly in line with our expectation of Rs6,250.9 crore for the quarter. The strong growth in the net sales was driven by a 21% growth in the HPC business (a 23.7% growth in the revenues of the soap and detergent segment and 16.7% growth in the revenues of the personal product business YoY). -
Soaps and detergents also show improvement in margins: The steep growth of 23.7% in the soaps and detergents business was partially driven by the price increases undertaken in the portfolio. On the other hand, the growth in the revenues of the personal products business was largely volume driven. The profit before interest and tax (PBIT) margin of the soap and detergent business expanded by 295 basis points YoY to 12.2% whereas the PBIT margin of the personal product segment sustained at 26% during the quarter. -
Margin improvement leads to 23.4% growth at operating level: The stand-alone business' gross profit margin (GPM) improved by 197 basis points YoY to 46.1% in Q1FY2013. The GPM also improved by 128 basis points on a sequential basis. The operating profit margin (OPM) improved by 107 basis points YoY to 13.4%, which was in line with our expectation of 13.2%. Hence, the operating profit grew by 23.4% YoY to Rs837.9 crore (which was slightly ahead of our expectation of Rs813.3 crore). -
Surge in other income boosts PAT: A higher than expected other income (including the other operating income) led to a 46% Y-o-Y growth in the adjusted profit after tax to Rs848.8 crore (adjusted for a pre-tax one-time income of Rs605 crore), which was much ahead of our expectation of Rs709.0 crore for the quarter. The other income stood at Rs347.2 crore in Q1FY2013 as against Rs126.1 crore in Q1FY2012. The surge in the other income was aided by a Rs71.7 crore profit on the sale of long-term investments and interest on income tax refund of Rs34.5 crore. -
Outlook and valuation: We will review our earnings estimates for FY2013 and FY2014 post the company's conference call tomorrow. At the current market price the stock trades at 30.6x and 26.5x its FY2013E and FY2014E earnings respectively. We maintain our Hold recommendation on the stock. Larsen & Toubro
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,529
Current market price: Rs1,375 Q1FY2013 results: First-cut analysis Result highlights -
Results exceed expectations; forex loss hurts margins: Larsen and Toubro (L&T)'s Q1FY2013 results were better than expected mainly on account of a robust performance by its engineering and construction (E&C) division and a higher other income. However, the good operating performance was shadowed by a foreign exchange (forex) loss of Rs267 crore. The order inflow registered a year-on-year (Y-o-Y) rise of 21% to Rs19,594 crore, led by the spill-over of the delayed orders from FY2012. The company has maintained its guidance of a 15-20% growth in both revenues and order inflow for FY2013. -
Stand-alone sales up 26%: L&T has reported a strong rise of 26% in its revenues (stand-alone) for Q1FY2013. The revenue growth was higher than our expectation of a 13% Y-o-Y growth. This was mainly on account of strong execution in the engineering and construction (E&C) segment, which reported a 30% growth in revenues. The electrical and electronics (E&E) division reported a subdued 2% Y-o-Y growth in revenues while the machinery and industrial product (MIP) division disappointed with a 17% Y-o-Y fall in revenues. -
OPM marred by forex loss: The reported operating profit margin (OPM) stood at 9.1%, much lower than our expectation of 11.5%. But it included a one-time forex related marked-to-market (MTM) provision (on forex borrowings/ exposure) of Rs267 crore which was shown under the "Selling, administration and other expenses" head. Adjusting for the same, the margin at 11.3% was largely in line with our expectation for Q1FY2013. -
Other income and lower tax rate aid PAT growth: A healthy other income, which doubled to Rs606 crore led by higher treasury gain and dividends from subsidiaries and associates, and a lower tax rate of 29.1% boosted the adjusted net profit (including forex losses) to Rs902 crore. This was a Y-o-Y increase of 21% and higher than our as well as the Street's expectations. There was an exceptional item (expense) of Rs38.3 crore pertaining to the compensation paid under a voluntary retirement scheme. -
Order inflow robust at Rs19,594 crore: The order inflow was robust at Rs19,594 crore (up 21% YoY) on the back of the spill-over of the delayed orders from the previous quarters. The management believes that the company's performance is on track to achieve its guidance of a 15-20% growth in both inflows and revenues in FY2013. The current order book stands at Rs1,53,095 crore (up 12% YoY and 5% quarter on quarter [QoQ]). The majority of the orders were received from the private players from the transportation, and building and factory segments. Going forward, the company expects good traction from the new markets like West Asia and South-East Asia. -
Outlook and view: The Street was worried about L&T's order book and execution amid a tough business environment. The company outperformed on these parameters during the quarter. However, a forex loss of Rs267 crore negatively impacted operating margin. We feel that with the increasing level of its overseas business, the impact of fluctuations in foreign currencies on its performance could become more unpredictable in the coming quarters. At the current level the stock is trading at 16.8x its FY2014E earnings. We would soon come out with a detailed note on its Q1FY2013 results. Reliance Industries
Cluster: Evergreen
Recommendation: Buy
Price target: Rs800
Current market price: Rs718 Petchem margin surprises negatively Result highlights -
PAT exceeds expectations on the back of higher other income and lower effective tax rate: In Q1FY2012 Reliance Industries Ltd (RIL) posted a net profit of Rs4,473 crore (a decline of 21% year on year [YoY]). The same is higher than our as well as the Street's estimates. In addition to better than expected refining margin ($7.6/barrel as against expectations of $7/barrel), a surge in the other income (up 76.6% YoY to Rs1,904 crore) and a lower tax rate (17.7% in Q1FY2013 vs 22% in Q1FY2012) led to better than expected earnings during the quarter. The net sales grew by 13.4% YoY to Rs91,875 crore, aided by a healthy revenue growth of 18.9% in its petrochemical division and that of 15.9% in its refining business. However, the revenues of the exploration and production (E&P) division declined by 35.6% on account of a falling output from the Krishna-Godavari (KG)-D6 basin. -
Refining margin sustained QoQ; better than expected: During the quarter the refining plant of the company achieved 111% of utilisation rate and refined 17.3 million tonne of crude oil against 17 million tonne refined in Q1FY2012. The gross refining margin (GRM) was maintained at $7.6/barrel as against the Street's expectation of a contraction quarter on quarter (QoQ). However, on a year-on-year (Y-o-Y) basis the GRM remained low as in Q1FY2012 the company had posted a healthy GRM of $10.3/barrel. The Y-o-Y contraction in the GRM was largely on account of a correction in the gas oil and gasoline cracks. The refining segment's revenues grew by 15.9% YoY to Rs85,383 crore but on account of a Y-o-Y fall in the GRM the earnings before interest and tax (EBIT) declined by 32.8% YoY. -
Petchem margin surprises negatively: During the quarter the revenues from the petrochemical (petchem) division grew by 18.9% YoY and by 2% QoQ. However, due to a reduction in the deltas across PP, PTA and MEG, the overall EBIT margin of the division contracted by 402 basis points YoY and 211 basis points QoQ to 8% (as against the expectation of a sequential improvement in the margin). Consequently, the EBIT from the division declined by 20.7% YoY to Rs1,756 crore. -
Gas output at KG-D6 basin continues to fall: The gas production from the KG-D6 basin during Q1FY2013 dropped both YoY and QoQ. The average daily production during the quarter dropped to 33mmscmd from 49mmscmd in Q1FY2012 and 36mmscmd in Q4FY2012. In case of the Panna-Mukta oilfield, the oil production during the quarter declined by 18.4% due to a natural decline in the reserve. The average crude oil price realisation for the quarter under review was $100 per barrel for the KG-D6 basin and $118 per barrel for the Panna-Mukta oilfield. -
Maintain Buy with price target of Rs800: We have maintained our earnings estimates for FY2013 and FY2014 at Rs61.5 and Rs64.9 respectively. Though the operational matrices are showing signs of concern, we believe most of the negatives are factored in the current valuation of the stock. This implies a limited downside from the current level. On the other hand, there is no trigger for RIL in the near term due to the overhang in terms of the output from the KG-D6 basin and the continued margin pressure in its petrochemical business. However, any development in terms of approval for further development of the KG-D6 block and/or margin improvement in the petrochemical business could be positive for RIL. Hence we maintain our Buy recommendation on the stock with a price target of Rs800 (based on the sum-of-the-parts valuation method). Currently, the RIL stock is trading at 11.7x and 11.1x of FY2013 and FY2014 estimated earnings respectively. Crompton Greaves
Cluster: Apple Green
Recommendation: Hold
Price target: Rs133
Current market price: Rs118 Price target revised to Rs133 Result highlights -
Accounting changes boost earnings; international business still struggling with losses: Crompton Greaves Ltd (CGL)'s Q1FY2013 consolidated results were marginally above expectations mainly led by a change in the depreciation policy (which boosted the net profit by Rs18.8 crore). The overseas subsidiaries of the company continued to book losses. The quarter saw a slowdown in CGL's industrial division owing to lower sales volumes of HT motors. The company is facing severe pricing pressure, sub-optimal capacity utilisation and cost overruns (mainly at the Belgium plant) in its overseas power system business. -
Order inflow shows growth on a low base: The consolidated order inflow for the quarter was robust at Rs2,718 crore, up 60% year on year (YoY) on a low base of Rs1,704 crore. This growth was led by a 67% year-on-year (Y-o-Y) growth in the power system business and a 38% Y-o-Y growth in the industrial system orders. The consolidated order backlog for the quarter stood at Rs9,172 crore, which is a growth of about 29% on a yearly basis. During the quarter, India's contribution to the total order inflow was the highest at 47%, followed by 25% by Europe, the Middle-East and Africa (EMEA); and 20% by the Americas. -
Margin guidance looks difficult to achieve; recovery still some quarters away: The management maintained its guidance of a 12-14% top line growth and an 8-9% margin for FY2013. This looks like an uphill task as the management is unsure of the pricing environment and hence is not sure if the margins would sustain in the domestic and overseas markets. Further, the restructuring of its Belgium operations could result in cost overruns in the coming few quarters. Hence, we feel that achieving an operating profit margin (OPM) of even 8% in FY2013 would be difficult, given the current competitive scenario in the Indian power sector and the slowdown in Europe. However, after the restructuring of its global operations, we feel that the company's profitability may start to improve from FY2014 onwards. -
Estimates fine-tuned: In view of the impending cost of restructuring the overseas operations, we have marginally downgraded our earnings estimate for FY2013 by 4% but revised upward our FY2014 earnings estimate by 8% on the back of the revival of demand for consumer products (revenues up 20% YoY) and better order inflow in the power system business. Overall, we are now expecting the company to post a yearly growth rate of 38% over FY2012-14E on a low base of FY2012. -
Price target revised to Rs133: The intense competition in the power transmission and distribution (T&D) segment remains a cause for worry for the power business (which accounts for over 40% of its stand-alone revenues). The recovery in the demand for consumer durables was the key positive development of the quarter. A slowdown in the capital expenditure (capex) in India and the overseas market (mainly Europe) doesn't augur well for the company. Further, the restructuring of its Belgium operations could result in cost overruns in the coming quarters. We believe that the turn-around would take at least a few more quarters and the stock would continue to languish in the meantime. Overall, we have revised our price target to Rs133 (12x FY2014 estimated earnings). The current valuation at 10.7x FY2014E earnings provides a limited upside to our price target. Hence, we maintain our Hold recommendation on the stock. Kewal Kiran Clothing
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs598
Current market price: Rs502 Price target revised to Rs598 Result highlights Q1FY2013 results - Muted discretionary demand resulted in dismal performance -
The environment on consumer discretionary spent continues to face contraction and challenges led by a bleak economic environment and high inflation. In the light of such a situation, Kewal Kiran Clothing Ltd (KKCL)'s Q1FY2013 performance reflected the general trend. The company's top line, operating profit as well as the net earnings for the quarter contracted by 18%, 45% and 42.4% respectively on a year-on-year (Y-o-Y) basis. -
The revenue contraction of 18% was a result of a 17% Y-o-Y decline in volumes, for which, the management attributed three reasons viz - soft environment, low inventory built up in Q1FY2013 and a high base effect of last year (wherein in Q1FY2012 the company had registered a 53% revenue growth). The management further mentioned that excluding the base effect and inventory impact, the revenue growth would have been flat for the quarter. -
During the quarter the impact of lower raw material prices came into play; the same got reflected in the gross margins which expanded by 81 basis points on a Y-o-Y basis. The gross margins improved from 60.4% in Q1FY2012 to 61.2% for the quarter under consideration. -
The deleveraging impact of lower sales on relatively inelastic fixed overheads played havoc for the operating margins. The operating margin for the quarter tumbled down by 820 basis points on a Y-o-Y basis from 25% in Q1FY2012 to 16.7% in Q1FY2013. -
The balance sheet continues to be strong with cash and cash equivalents at about Rs136 crore (constituting ~21% of the current market capitalisation). The return on capital employed (RoCE) and return on equity (RoE) for the quarter stood at 17.8% and 16% respectively. Downgrading earnings estimates: Incorporating weak Q1FY2013 results into our estimates, and building for another two to three quarters of soft demand, we have reduced our earnings by 20% for FY2013E and 14.7% for FY2014. Our revised earnings per share (EPS) estimates for FY2013 and FY2014 stand at Rs38.5 and Rs49.8 respectively.
Click here to read report: Investor's Eye Maintain Hold: KKCL's superior business model (strong brands sold on outright basis via various distribution channels) coupled with its management's financial acumen (profitable growth approach and abidance to superior corporate governance practices) keep us bullish on its business. We ascribe a price/earnings ratio (PER) of 12x our FY2014E EPS of Rs49.8 to arrive at a price target of Rs598. Though we continue to like the business, the near-term sluggishness in the discretionary spent category makes us stick to our Hold rating on the stock. | | 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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