Hindustan Unilever
Recommendation: Hold
Price target: Rs500
Current market price: Rs498
Moderation in volume growth arrested
Result highlights
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Q4 performance a mix bag: The performance of Hindustan Unilever Ltd (HUL) was a mix bag in Q4FY2013. The volume growth of 6% in the domestic consumer business was ahead of the Street's as well as our expectations of a 5% volume growth. However, the same is way below the 10% volume growth clocked by the company in the past. The benign raw material prices helped HUL to achieve an improvement of 125 basis points in its gross profit margin (GPM). The improvement in the profitability of the core soap and detergent segment and the strong operating performance of the beverage segment (with an 18% year-on-year [Y-o-Y] growth in revenues and a 250-basis-point improvement in the PBIT margins) were the highlights of the quarter. The personal care business disappointed again. The revenues of the personal product segment grew by just 12.1% year on year (YoY) as it bore the brunt of cuts in discretionary spending. The PBIT margin of the personal product segment declined by over 200 basis points YoY.
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Performance snapshot: In Q4FY2013, HUL's net sales grew by 12.5% YoY to Rs6,367.1 crore vs the expectation of Rs6,357.4 crore for the quarter. The benign key input prices helped the company to improve its GPM by 123 basis points to 46.1%. However, on account of competitive intensity the company maintained higher spending on advertisements during the quarter. Hence, the advertisement spending as a percentage of sales increased by 93 basis points YoY to 12.9% during the quarter. The other expenses as a percentage of sales declined by 58 basis points YoY to 14.6%, despite of a 30-35-basis-point impact of increase in the royalty charges. The operating profit margin (OPM; excluding the operating income) improved by 84 basis points YoY to 13.7%, which is largely in line with our expectation of 13.4% for the quarter. Hence, the operating profit grew by 19.8% YoY to Rs872.1 crore. However, a higher incidence of tax resulted in a 16.6% Y-o-Y growth in the adjusted profit to Rs780.0 crore (which is marginally lower than our expectation of Rs803.6 crore).
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Paid final dividend of Rs6 per share: The company paid its shareholders a final dividend of Rs6.00 per share for FY013. Hence, with an interim dividend of Rs4.50 per share and a special dividend of Rs8.00 per share the final dividend works out to Rs18.50 for FY2013. Excluding the special dividend, the dividend yield for HUL stood at 2.6% in FY2013.
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Outlook and valuation: HUL was able to arrest the moderation in the sales volume in Q4FY2013 after two quarters of sequential moderation in the volume growth. However, the sustenance of the improvement in the volume growth in the current inflationary environment would be the key focus area for the company. We like the company's strategy of continuous innovation in the product portfolio with focus on long-term growth in the domestic market. Also, the benign raw material prices would help the company to tackle the near-term growth concerns.
We believe the next two quarters will have to be keenly monitored in terms of any improvement in the volume growth. We broadly maintain our earnings estimates for FY2014 and F2015. At the current market price the stock is trading at 29.9x FY2014E earnings per share (EPS) of Rs16.6 and 27.1x FY2015E EPS of Rs18.4. We maintain our Hold recommendation on the stock with the existing price target of Rs500.
Federal Bank
Recommendation: Buy
Price target: Rs545
Current market price: Rs448
Operating performance disappoints
Result highlights
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Federal Bank's Q4FY2013 net earnings were in line with our estimate, which declined by 6.6% year on year (YoY) to Rs221.9 crore. Though the operating performance was subdued, a relatively better growth in the non-interest income and a lower tax outgo cushioned the net profit to an extent.
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The net interest income (NII) growth was short of our estimate as it declined by 2.3% YoY to Rs479.8 crore, led by ~40-basis-point sequential dip in the net interest margin (NIM) to 3.07%. A reduction in the base rate, a higher growth in the corporate segment and interest reversals contributed to the decline in the NIMs.
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The business growth picked in Q4FY2013 but was dominated by the wholesale segment. The advances grew by 16.8% YoY (11.7% quarter on quarter [QoQ]) mainly from the large corporate segment. The current account and savings account (CASA) ratio dipped to 26.9% from 29.5% in Q3FY2013.
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The bank's growth in the non-interest income was strong at 22.6% YoY (down 3.4% QoQ), on account of a modest fee income growth (11.3% YoY), a treasury profit to the tune of Rs57.6 crore (Rs36.4 crore in Q4FY2012) and higher recoveries from the written off account (Rs17.4 crore in Q4FY2013).
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The asset quality showed signs of stress in Q4FY2013, especially from the corporate, and small and medium enterprise (SME) segments as the slippages increased in these segments. Moreover, the bank restructured Rs219.6 crore of advances, thereby taking the restructured book to 4.6% of advances.
Valuation
Federal Bank's Q4FY2013 results disappointed at the operating level as the NIMs declined sharply on a quarter-on-quarter (Q-o-Q) basis. Further, the slippages remained high mainly contributed by the corporate and SME segments. The management expects the return on equity (RoE) to expand by 150 basis points in FY2014 driven by an uptick in the NIMs and a decline in the credit cost. However, we believe the tough economic environment is likely to play out on the bank's performance despite the strong initiatives taken by management. Therefore, we have reduced the valuation multiple and rolled over the valuation to FY2015 estimate, resulting in price target of Rs545. The stock is currently trading at 1.0x FY2015 book value. We maintain our Buy rating on the stock.
Raymond
Recommendation: Buy
Price target: Rs477
Current market price: Rs281
Upgraded to Buy
Q4FY2013 consolidated key result highlights
Revenue growth at 13.1% YoY: Raymond's net sales increased by 13.1% year on year (YoY) to Rs1,081.4 crore on account of a strong performance of the textile (on account of a good growth of the Makers brand), garmenting (result of extended end of season sale and inventory liquidation exercise), and hardware and tools business.
EBITDA margin expands by 44 basis points: An improvement in the gross profit margin (GPM; +30 basis points YoY) coupled with the cost rationalisation efforts (mainly the staff cost expense) was the main contributor to the EBITDA margin expansion, which increased by around 40 basis points to 10.1% for Q4FY2013.
Profit lags operational performance: Despite the EBITDA growth at 18.2% on a year-on-year (Y-o-Y) basis, the higher incidence of tax coupled with exceptional items to the tune of Rs5.83 crore resulted in the company reporting a marginal profit after tax (PAT) of Rs61 lakh.
Inventory liquidation largely over: The management indicated that the company has reduced its high cost inventory from around Rs110 crore to around Rs29 crore and the inventory situation was much more manageable today. With the inventory liquidation largely done with, we believe that better times lie ahead for the branded apparels segment.
Focus on land bank monetisation: The management expect a master plan draft on the monetisation to be out in the next six months. We believe that any development on this front would help the company in reducing its debt and strengthening its balance sheet. Conservatively, we have built in 50% value of the land in our price target for the company.
Upgrade to Buy; price target Rs477: In the wake of improving business fundamentals, cleaner balance sheet and exhibition of lean working capital execution, the management's enhanced focus towards the monetisation of its lucrative 120 acre land bank parcel (with its core team in place) coupled with the stock's underperformance in the recent times (ruling at an attractive valuation at EV/EBITDA of 4.3x its FY2015) led us to upgrade the stock from Hold to Buy, with a price target of Rs477 (we have valued the core retail business at 5.5x its FY15 EV/EBITDA + 50% value of the land bank parcel).
Maruti Suzuki India
Recommendation: Buy
Price target: Rs1,950
Current market price: Rs1,681
Price target revised to Rs1,950; upgraded to Buy
Result highlights
Q4FY2013 results incorporate SPIL numbers, hence not comparable; stand-alone business reports better operating performance
Maruti Suzuki India Ltd (MSIL)'s Q4FY2013 numbers incorporated the results of Suzuki Power Train India Ltd (SPIL; the diesel engine manufacturing arm of the Suzuki Group) and hence are not comparable. The margins more than doubled after incorporating the SPIL numbers.
However, if we exclude SPIL, the core automobile (auto) business reported a better operating performance. The core business reported an operating profit margin (OPM) of 10.6%, which is an improvement of 330 basis points year on year (YoY) and 260 basis points sequentially. This is on account of a lower discounting and the yen's depreciation. A higher other income and a lower taxation led to the net profit coming at 46% above estimate, which pleasantly surprised the market.
Passenger vehicle industry to grow in mid-single digits in FY2014, MSIL to maintain market share
The passenger vehicle industry ended FY2013 with a growth of meagre 2%. With the continued challenging macro-economic conditions (subdued economic scenario, high inflation and higher fuel prices), the growth in the passenger vehicle industry is expected to remain lacklustre in FY2014. The management expects the industry to record a growth of 5% in FY2014.
Despite the challenging industry environment, MSIL improved its market share in the passenger vehicle space. MSIL's market share improved from 38.3% in FY2012 to 39.2% in FY2013 on account of good demand for the diesel cars (Swift, Dzire) and an entry into fast-growing utility vehicle (UV) space with Ertiga. With a planned diesel capacity of 3 lakh diesel engines and a sustained demand for the diesel products, we expect MSIL to maintain the market share in the passenger vehicle industry.
Yen's depreciation to aid margins further
The yen has depreciated 13% in the last four months. As against the rate of Rs0.67/yen in Q3FY2013, the yen has depreciated to Rs0.58/yen in the January-April 2013. In Q4FY2013, MSIL's margin improved by 130 basis points on account of a favourable yen movement. We expect MSIL's margin to improve by 70 basis points in FY2014 if the yen/rupee rate sustains at the current levels. Moreover, MSIL's discounts/car reduced from Rs12,159/car in Q3FY2013 to Rs10,597/car in Q4FY2013. This is on account of a favourable product mix. The diesel cars (Swift, Dzire and Ertiga) have zero discounts. Also, the petrol versions of the above models do not have discounts. Further, the increased sales of the new Alto (which also has zero discounts) helped in the overall reduction in the discounts. The management expects the discounts to remain at the similar levels, which would support the margin going forward.
Merger of SPIL to provide synergistic benefits
MSIL announced the merger of SPIL with itself. SPIL is the producer of diesel engines and transmissions. Given the increased preference for the diesel cars, the merger would bring synergistic benefits. MSIL is setting up a plant in Gurgaon with a capacity of 3 lakh diesel engines per annum, which is expected to be operational in H2FY2014. A single entity would provide benefits in the form of better sourcing, localisation, production planning and overall cost synergies.
Valuation
We are retaining our volume assumptions for FY2014 and FY2015 at 1.27 million and 1.43 million respectively. However, we have raised our margin estimate on account of a lower discounting and a further depreciation of the yen. Also, the merger of SPIL with the stand-alone business is expected to raise the margin further. We have revised our FY2014 and FY2015 earnings estimates to Rs117/share and Rs130.3/share respectively. Our price target stands revised at Rs1,950/share. We recommend Buy rating on the stock.
CanFin Homes
Recommendation: Buy
Price target: Rs220
Current market price: Rs157
Strong growth in advances to continue
Result highlights
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CanFin Homes' Q4FY2013 results were in line with our estimate as the net profit grew by 8.4% year on year (YoY) to Rs15.5 crore. The operating performance remained strong, though the higher operating expense (opex) and tax rates had some impact on the Q4FY2013 profit. For FY2013, the company made a profit of Rs54.12 crore (up 23.5% YoY).
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The lnet interest income (NII) registered a growth of 38.7% YoY to Rs31.5 crore. This was mainly driven by a strong growth in advances.
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The loan book grew by 49.9% YoY (11.7% quarter on quarter [QoQ]) driven by 111.2% growth in the disbursements. During the quarter, the sanctions showed a robust growth of 40% QoQ (89.3% YoY). The management targets to grow its loan book by 37.0% in FY2014 to Rs5,500 crore.
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The opex was high, though lower than Q3FY2013, due to addition of new branches and manpower during the year. There was a provision reversal of Rs1.38 crore from non-performing asset in Q4FY2013. The company also provided Rs3 crore towards standard asset provision in Q4FY2013.
Valuations and outlook
During Q4FY2013, the CanFin Homes' operational performance remained strong as the NII growth was robust. The company has added 17 branches in FY2013 and will add another 10-12 branches in FY2014, which will drive the growth in advances and will soften the cost/income ratio. Also, the company's sanctions have grown at 89.4% in FY2013 whereas the home loan demand remains buoyant (in the southern regions), which should lead to a strong growth in loans. We expect CanFin Homes' earnings to grow at a compounded annual growth rate (CAGR) of 25.0% over FY2013-15 leading to a return on equity (RoE) of 17.2%. Further, the company has announced attractive dividend of Rs4 per share (dividend yield 2.5%), which makes the stock attractive. We maintain our Buy recommendation on the stock with a price target of Rs220.
VIEWPOINT
Hero MotoCorp
Low on growth; high on margin
Conference call highlights
Management guides for higher single-digit growth for industry
The management expects the two-wheeler industry to register a higher single-digit growth in FY2014. The continued macro-economic challenges in the form of weak economic growth and high fuel prices would restrict the overall growth. They expect the scooter sales to continue outperforming and increase its share in the overall industry.
HMCL going slow on exports due to subdued environment
Given the subdued environment, HMCL is going slow on its export plans. The industry's exports declined by 1% in FY2013, which is the first decline since FY2002. HMCL exports in FY2013 fell 16% to 1.61 lakh units. However, HMCL has commenced exports to new countries like Latin America and Africa, which are expected to shore up the export volumes in FY2014.
HMCL market share declines on increased competition
Honda Motorcycle & Scooter India (Honda)'s aggressive expansion into the domestic market has lead to a decline in the market share for the incumbents. HMCL being the market leader has seen a maximum erosion of its market share. HMCL's share in the two-wheeler space declined from 45.1% in FY2012 to 42.9% in FY2013. Though HMCL's market share for the motorcycles declined from 55.9% in FY2012 to 53.2% in FY2013, its market share for scooters increased from 16.2% in FY2012 to 18.8% in FY2013. Given the recent entry of Honda into the entry-level motorcycle space, we expect HMCL to continue losing its market share in the domestic two-wheeler industry.
Margin improvement to sustain
HMCL Q4FY2013 margin improved by 120 basis points sequentially and was 80 basis points above our expectation. This was on account of the lower commodity prices and the yen's depreciation. The yen denominated import contributed to 5% of sales. Given the further yen depreciation and subdued commodity prices, we expect a sustained improvement in HMCL's margin. Further, HMCL has taken price increases of 1-3%, which would help sustain the margin.
Valuation
We have lowered our volume assumption on account of a subdued domestic industry and an increased competition, resulting into a loss of market share. HMCL's margin is expected to improve given the weakness in the yen and the recent price hikes taken. Our earnings estimates for FY2014 and FY2015 stand revised at Rs111.6 and Rs142.2 per share respectively. We have a Neutral view on the company.
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