[T.S.R:10897] investors eye from sharekhan

STOCK UPDATE 

Hindustan Unilever

Recommendation: Buy

Price target: Rs303

Current market price: Rs274

 

Upgraded to Buy

Key points

With the corrective actions implemented by Hindustan Unilever Ltd (HUL; especially for the mass segment products at the bottom of the pyramid), we saw a recovery in the volume growth to 2% in the April-June 2009 quarter as against the 4.2% year-on-year (y-o-y) decline in the January-March 2009 quarter. Also, the relaunch of the old brands and the introduction of products at low price points would help in improving the volume growth in the coming quarters. Consequently, we expect the company to regain its lost market share in key categories. 

With a greater emphasis on the volume growth the company has passed on a substantial portion of its gains (from a lower raw material cost) to consumers and stepped up its advertising spends. However, the rationalisation of spends on the other cost heads apart from some margin gains from the lower raw material cost would ensure a higher operating profit margin (OPM) year on year (yoy). Thus, overall we expect the company?s OPM to improve by 195 basis points yoy in FY2010. 

The risk of derailment of rural consumption growth is reduced by the expectations of a better rabi crop (on back of a late revival in the monsoon rains) and increased government spend under the National Rural Employment Guarantee Scheme (NREGS). This is critical for HUL as ~45% of its sales come from rural India. 

Thus, the positive results of the corrective actions implemented by the company at the mass end and the expectations of a better rabi crop would considerably ease the risk of poor performance owing to any slackening in rural consumption due to a poor kharif crop, which had been overhang on the stock. Consequently, we upgrade our recommendation on HUL from Hold to Buy. At the current market price the stock trades at 25.9x its FY2010E of Rs10.6 and 22.6x its FY2011E of Rs12.1. We maintain our price target of Rs303.

 

 

 

 

 

United Phosphorus

Recommendation: Buy

Price target: Rs225

Current market price: Rs167

 

Annual report review

Key points

FY2009 operational performance: Thanks to a well diversified business model?both in terms of products and markets?United Phosphorus Ltd (UPL) reported a strong set of numbers in FY2009. During the year the consolidated net sales grew sharply by 36.6% year on year (yoy), while the operating profit rose by 33.9% yoy on account of improvement in operating margins. The strong operating performance during the fiscal clearly reflected in the company?s return ratios, as the return on net worth (RONW) improved significantly to 18.1% in FY2009 from 12.5% in FY2008, while the return on capital employed (ROCE) improved, albeit at a slower rate, to 16.4% in FY2009 from 14.9% in FY2008.

Robust stand-alone performance?: On stand-alone basis too UPL delivered robust performance with 65.3% year-on-year (y-o-y) increase in its stand-alone net sales. Moreover, driven by stiff cost control measures, a 250-basis-point improvement in the operating margin to 14% led to a steep 94% y-o-y increase in the operating profit during the same period. However, higher foreign exchange (forex) loss took its toll on the bottom line, thereby restricting the net profit growth at 68.7% yoy in FY2009. 

? driven by exports: The strong growth in stand-alone revenues could be attributed to substantial 86% y-o-y increase in export revenues. Resultantly, the share of exports in stand-alone revenues moved up sharply to 60.4% as compared with 53.7% in the previous year. 

High debt due to sharp increase in working capital?: UPL?s debt in FY2009 increased to Rs2,066.5 crore from Rs1,568.3 crore in the previous year. During the year, the company raised Rs170 crore through non-convertible debentures and also issued some short-term commercial paper to fund higher working capital requirement. The net current assets of the company grew sharply by 63.4% yoy, leading to a significant increase in net working capital days in FY2009.

? and high capital expenditure: Besides higher working capital requirement, the company also incurred capital expenditure (capex) of over Rs350 crore during the year, leading to 20% y-o-y increase in its gross block. However, despite such increase in the debt, the net debt to equity of the company remained comfortable at 0.6x as on March 31, 2009. 

Forex losses push up interest costs: The financial charges increased significantly to Rs292 crore in FY2009 from Rs169 crore in FY2008. The steep increase in financial charges during the year could be partially ascribed to Rs115.8 crore forex loss recorded under the head interest cost. Besides higher debt raised by the company during the year coupled with higher interest rates prevalent during most part of the previous fiscal too contributed to the same.

Forthcoming FCCB conversion: The company has 50 foreign currency convertible bonds (FCCBs) with face value of USD10,000 each outstanding, which are due for conversion at any time on or before October 6, 2009. Each bond will be converted into fully paid up equity share with par value of Rs2 per share at a fixed price of Rs72.88 per share. However, we have already factored in the full equity dilution, which could result in due to full FCCB conversion for 2009 and 2011 series. Hence we do not see any material impact of this on our earnings estimates.

Valuation and outlook: The management continues to remain optimistic and has an upbeat outlook regarding the future of the company. It expects FY2010 to be a good year in terms of sales and profitability on account of stable domestic sales and tremendous growth potential for agrochemicals industry globally. We have fine-tuned our earnings estimates to factor in the details from the annual report of the company. At the current market price the stock trades at 11.0x and 9.1x its FY2010E and FY2011E earnings respectively. We maintain our Buy recommendation on the stock with the price target of Rs225.

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