Investor's Eye
[December 13, 2012] | | |
| Summary of Contents STOCK UPDATE Hindustan Unilever
Recommendation: Hold
Price target: Under review
Current market price: Rs520 Event Update: Unilever Indonesia hikes royalty payments to Unilever Key points The event-Unilever Indonesia increases royalty payment to its parent Unilever: Unilever's Indonesian subsidiary, PT Unilever Indonesia, has approved a hike in royalty payments to its parent Unilever. Unilever Indonesia has agreed to pay a 5% fee and a maximum of 3% actual cost recovery as compared with the existing 3.5% fee. Fears about similar changes in HUL's royalty fee structure: The hiking of royalty fees for Unilever Indonesia has led to fears of a similar action on Hindustan Unilever (HUL). HUL currently pays a royalty fee of 1% of the net sales for using the brands and trademarks held by Unilever. HUL has been paying 1% royalty to Unilever since August 1999 when for the first time entered it into a technical collaboration agreement with Unilever. The same was revised in December 2009, wherein additional products were added to the arrangement. The products added included product categories, where technical inputs are provided by Unilever, and products of specified categories manufactured by third-party manufacturers, where technical inputs developed by Unilever were made available to them. It is not necessary that a similar action will be taken with respect to HUL. However, it has dented sentiments on the stock. Any adverse development on the royalty payment issue could result in an additional pressure on the margin. We believe that in the current challenging environment, with the volume growth moderating, the company may be unable to resort to price hikes to offset the impact of royalty payments. Valuation-at a premium to long-term average multiples, any negative cue creates selling pressure: At the current market price of Rs520, the stock trades at 29.9x its FY2014E earnings per share (EPS) of Rs17.4 and 26.3x its FY2015E EPS of Rs19.8. The business fundamentals remain intact but the valuation is not cheap anymore, which led to selling pressure on negative cues. However, given the strong brand equity and quality of management, we believe that the company is likely to trade at a premium. Hence, we maintain our Hold rating on the stock with price target under review.
SECTOR UPDATE Transmission and distribution Still not out of the wood; though there are signs of competition softening Key points -
Relatively weaker flow YTD: The order awarding activity of Power Grid Corporation of India Ltd (PGCIL) picked up in September at around Rs1,873 crore. However, October and November (part of Q3FY2013) have broadly recorded average ordering to the tune of ~Rs700 crore in each month. In Q3FY2013, we expect that PGCIL will find it difficult to catch up with order flow compared with that of Q3FY2012, given the year-till-date (YTD) order flow. However, going by the historical trend, significant (almost 40-50%) ordering is expected in Q4FY2013. -
Transmission line segment remained the highest contributor, while KPTL and KEC regained the market share: Among segments, order from the transmission line segment remained the highest growth contributor in YTDFY2013, contributing around 35% (excluding transmission line order of high-voltage direct current [HVDC] multi-terminal system worth Rs2,500 crore during June 2012). In the transmission line segment, we observed that (KEC; 17%) and Kalpataru Power Transmission Ltd (KPTL; 14%) regained their market share YTD. -
Rise in share of international players; a trend or aberration?: Overall, the domestic players dominated the PGCIL order flow for many years. However, in YTDFY2013, the market share of international players touched around 21% YTD. Even this is relative higher compared with the market share of 10% in FY2012, excluding HVDC order worth Rs2,495 crore. However, it is still early to believe that there is a change in trend. -
Competition still alive; though there are signs of softening: Competition has intensified in the last couple of years but our interaction with several companies hints that the intensity is softening. We also found that in the sub-station and transmission segments, the average bidder per contract stepped down from FY2011 to FY2013. In case of the transmission line segment, the average bidders were six in YTDFY2013 compared with nine in FY2012 and seven in FY2011. In the sub-station segment, the average bidders were eight in FY2011 which dropped to six in YTDFY2013. In the conductor segment, the average bidder remained around four in YTDFY2013.
Further, we found that the percentage of orders that received bid from more than ten participants fell from 48% in FY2011 to 12% in FY2012 and 19% in YTDFY2013. The transmission line segment also replicated the trend. However, the conductor segment defers from this trend as there is an increase in the number of bidding per contract from FY2011 to YTDFY2013. -
Near- to medium-term order flow to taper down from PGCIL; though global opportunity visible: Our interaction with the management of PGCIL revealed that around Rs70,000 crore of orders were already placed by the company out of the total approved investment worth Rs85,500 crore for the 12th five-year plan. Out of the approved investment, around Rs15,000 crore of ordering is pending. PGCIL would require additional orders worth Rs15,000 crore to touch the target of Rs100,000 crore. So, we believe that till the end of FY2015, ordering could be around Rs30,000 crore on the higher side from the PGCIL. Ordering from the PGCIL crossed Rs18,000 crore in FY2011 and Rs22,000 crore in FY2012, which should not be above Rs15,000 crore on an average in the next two years. Hence, we maintain our cautious stance. Nevertheless, opportunity from the international market is likely to remain buoyant driven by the aging infrastructure requiring replacement, investment driven by American Recovery and Reinvestment Act and finally due to a smart grid and focus on renewable sources.
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