| Summary of Contents STOCK UPDATE Hindustan Unilever
Cluster: Apple Green
Recommendation: Reduce
Price target: Under review
Current market price: Rs306 Price target under review Q2FY2011 results: First-cut analysis - Hindustan Unilever Ltd (HUL)?s Q2FY2011 results are in line with our expectations. The adjusted net profit stood flat at Rs534.2 crore (in line with our estimate of Rs526.7 crore), mainly on account of a higher than expected other income during the quarter.
- The company?s net sales grew by 10.7% year on year (YoY) to Rs4,680.9 crore driven by a strong year-on-year (Y-o-Y) growth of 14% in the sales volume of the domestic consumer business (higher than the Y-o-Y growth of 10.9% and 10.3% in Q4FY2010 and Q1FY2011 respectively).
- The household & personal care (HPC) business grew by 9% YoY with a good growth across the product portfolio. As anticipated, the soap and detergent segment grew by 6.3% YoY with a strong volume growth in the laundry segment. The personal care segment registered a growth of 15% YoY on the back of a double-digit volume growth.
- The food business grew by 13% YoY as the beverage segment grew by 9% YoY and the process foods segment, continuing its strong performance, grew by 26.2% YoY during the quarter.
- Despite a benign raw material cost (as a percentage of the total sales) on a Y-o-Y basis the operating profit margin (OPM) declined by 242 basis points YoY to 12.0% (below our expectation of 13.1%), mainly on account of a 232-basis-point Y-o-Y surge in the operating expenses as a percentage of the total sales. Thus, the operating profit declined by 7.8% YoY to Rs563.1 crore during the quarter (below our expectation of Rs607.4 crore).
- The advertisement cost as a percentage of the total sales stood flat at 13.8% in Q2FY2011 (the same was down by 186 basis points on a quarter-on-quarter basis).
- The higher than expected other income caused the adjusted net profit to remain flat at Rs534.2 crore during the quarter (in line with our expectation of Rs526.7 crore). The other income during the quarter stood at Rs160.6 crore as against Rs88.4 crore in Q2FY2010 (the same was also higher than our expectation of Rs120.0 crore).
- After including the exceptional item of Rs32 crore (post-tax), the reported net profit grew by 32.1% YoY to Rs566.1 crore during the quarter.
- Under the ongoing buy-back scheme the company (till September 2010) has bought back 2 lakh shares at an average price of Rs266.75 for a total consideration of Rs5.34 crore. Considering the approved maximum outlay of Rs630 crore for the buy-back, the company could further buy back 2.23 crore equity shares at a cap price of Rs280 per share.
- The sustenance of the strong volume growth in the coming quarters would help HUL to achieve a double-digit topline growth in FY2011. However, rising input cost and advertisement & promotional spends are the key headwinds that HUL will face on the margin front in the coming quarters. We will review our estimates and come out with a detailed result note after the conference call with the management of the company tomorrow. At the current market price the HUL stock trades at 30.0x its FY2011E earnings per share (EPS) of Rs10.2 and 25.1x its FY2012E EPS of Rs12.2. Currently, we have a Reduce rating on the stock.
Piramal Healthcare
Cluster: Apple Green
Recommendation: Hold
Price target: Rs522
Current market price: Rs495 Price target revised to Rs522 Result highlights - Buyback unattractive at Rs600 per share: Piramal has chosen to buy back up to 20% of its equity at Rs600 per share. Promoters would also participate in the buyback, tendering their equity in the same proportion as the minority share holders. The buyback would entail a cash outflow of Rs2,508 crore and is likely to be completed by February 2011. We believe that the buyback holds little to no interest for the investors like the issue of the dividend and could put the stock under some pressure. The stock could stabilise approximately at a level of Rs468. The investors can look at buying opportunities at dips.
- Results below estimates: Piramal Healthcare (Piramal)?s revenues de-grew by 25% year on year (YoY) to Rs752 crore, which is below our estimates of Rs849 crore as the management concentrated on the closure of the Abbott transaction. Piramal reported an operating loss of Rs25.4 crore for the quarter which factors in the impact of the one-time expense of Rs120 crore as bonus payment to employees from the deal closure and a foreign exchange (forex) loss of Rs12.65 crore. Operating margins stood at negative 3.4%. The net profit for the quarter stood at Rs12,540 crore after factoring in a) a net exceptional income of Rs16,224 crore from the sale of the healthcare business to Abbott and b) a tax outgo amounting to Rs3,600 crore for the quarter. After adjusting for exceptional gains, the net loss at profit before tax (PBT) level stood at Rs40 crore.
- Base business disappoints: The uncertainty in the healthcare solutions business (down by 21.9% as against an industry growth of 15-16%) as well as the transition costs associated with the sale of the business resulted in a negative top line growth of 26.3% during the quarter. The contract research and manufacturing services (CRAMS) segment posted a decline of 27.6% YoY with Indian assets declining by 40.6%. The critical care business also disappointed and declined by 27.7% YoY (the lowest in the past six quarters).
- Revise estimates downwards: The management guided for a downward revision in the company?s numbers in Q3FY2011 as it would fail to meet certain targets. Given the disappointing performance in the residual businesses, we have reduced our earnings estimates for the residual businesses. Our revised earning per share (EPS) stands at Rs9.2 for FY2011E and Rs15.7 for FY2012E on an adjusted basis.
- Maintain Hold, price target of Rs522: We remain cautious on the stock due to the risk associated with the utilisation of cash proceeds from the Abbott and Religare deals. More clarity should set in from Q3FY2011 onwards. Therefore, while the net present value (NPV) of these cash proceeds is Rs528, we ascribe a 20% discount to this value; our risk adjusted NPV thus stands at Rs422. We value the residual business at Rs99, bringing our total price target to Rs522, a 5.5% upside from the current levels.
Bank of India
Cluster: Apple Green
Recommendation: Hold
Price target: Rs533
Current market price: Rs520 Price target revised to Rs533 Result highlights - Results below expectations: For Q2FY2011 Bank of India (BoI) reported a net profit growth of 90.7% year on year (YoY) to Rs617 crore. The profit growth was aided by the low base of the previous year. On a sequential basis, however, the performance was muted with the bank recording a 15% contraction in its bottom line. The bank?s net profit for the quarter stood below our expectations as well as the street?s expectations due to higher than expected provisioning during the quarter.
- Strong NII growth: The net interest income (NII) was up a strong 26.1% YoY to Rs1,776.1 crore, supported by a healthy 22.6% year-on-year (Y-o-Y) growth in the advances as well as a 24-basis-point Y-o-Y improvement in the reported net interest margin (NIM) to 2.81%. On a sequential basis, however, the reported NIM deteriorated by eight basis points due to a 30-basis-point sequential increase in the cost of funds.
- Provisions rise 36.7% sequentially: The provisions stood at Rs527.4 crore, up 36.7% sequentially; the same stood above our expectations as the bank made certain floating provisions in order to reach the provision coverage mandate of 70% (including technical write-offs).
- Slippages pose significant concern: The asset quality of the bank improved sequentially with the rise in its gross non-performing assets (GNPAs) contained at 1.6% quarter on quarter (QoQ) on the back of higher write-offs. On a relative basis, the bank saw a seven-basis-point improvement in its %GNPA to 2.64%. The percentage of its net non-performing assets (NNPAs) also witnessed an improvement of four basis points sequentially to 1.14%. Despite the reduction in the %GNPAs, the underlying asset quality remained weak as slippages remained high. The slippages for the quarter stood at Rs818.4 crore as compared to Rs618 crore for the previous quarter.
- Maintain Hold with a revised price target of Rs533: BoI?s Q2FY2011 performance was disappointing in terms of asset quality. Hence, we have revised our estimates for the company to factor in the acceleration in provisioning as well as the sustained high level of slippages. At the current market price of Rs520, BoI trades at 8.1x FY2012E earnings per share (EPS), 4.2x FY2012E pre-provisioning profit (PPP) per share and 1.8x FY2012E adjusted book value (ABV) per share. We maintain our Hold recommendation on the stock with a revised price target of Rs533.
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