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| Summary of Contents | STOCK UPDATE Hindustan Unilever
Recommendation: Reduce
Price target: Rs520
Current market price: Rs581 Volume growth further moderates to 3%, margin concern ahead Result highlights - In Q4FY2014 Hindustan Unilever's volume growth further moderated to 3% from 4% in Q3FY2014 (and 5% in Q2FY2014) because of sales pressure in some of the key categories, such as soaps, detergents, skincare products and oral care. The GPM stood flat at 46.0% while the OPM (excluding other operational income) declined by 59BPS YoY to 13.1%. The operating profit grew by 4% and the adjusted PAT grew by 5% to Rs820.6 crore in the quarter.
- The key disappointment for the quarter was a 1% sequential decline in the volume growth and a sequential decline of 193BPS in the GPM. We do not expect the volume growth to improve significantly in the future because the consumer sentiment remains subdued and the monsoon rainfall is expected to be below normal (which would affect the rural demand for FMCG products in the coming quarters). The GPM is likely to decline further due to high input prices and the unlikelihood of any significant price hike in the near future.
- We have marginally reduced our earning estimates for FY2015 and FY2016 by 4% each to factor in the lower than expected revenue growth in the core soap & detergent segment and the personal product segment. The current premium valuation of 29x FY2016E earnings is not sustainable in view of the expectation of a muted performance in the coming quarters. Hence, we maintain our Reduce rating on the stock with an unchanged price target of Rs520.
UPL
Recommendation: Buy
Price target: Rs310
Current market price: Rs277 Q4 results beat expectations; price target revised to Rs310 Result highlights - In Q4FY2014 the revenue growth of United Phosphorus at 18% was contributed by a healthy volume growth of 9% (blended across regions) along with a 2% improvement in the realisations and a favourable impact of the exchange rate movement. An improvement of 100BPS in the operating profit margin enabled the company to report a net profit growth of 30% for the quarter. After adjusting for the non-recurring one-time items (like restructuring costs and a fee of Rs41 crore), the net profit spurted by 28% to Rs402 crore.
- The working capital cycle stood at 93 days as against 92 days in Q4FY2013. In the coming years the company will reduce its debts from the current level, with the focus on improving the return ratios and offering attractive rewards to the shareholders (by paying higher dividend, share buy-back etc).
- The management has guided to a revenue growth of 12-15% for FY2015 and a margin improvement of 100BPS. We have fine-tuned our estimates for FY2015 to reflect the expected decline in the interest outgo and the increase in the depreciation charge during Q4FY2014. We have also introduced our earnings estimate for FY2016 in this note. Consequently, we have revised our price target upwards to Rs310 (valuing the company at 10x FY2016E). We maintain our positive stance on the stock with a Buy rating. The key risk: the likely onset of El-Nino in India which may negatively affect the Q2 and Q3 earnings in FY2015.
Shree Cement
Recommendation: Hold
Price target: Rs6,010
Current market price: Rs5,740 Key player of performing north region; maintain Hold with revised price target Result highlights - Shree Cement reported a net profit decline of 17% in Q3FY2014 owing to a deteriorating operating performance in the cement and power divisions. The operating performance remains under pressure owing to sustained cost pressures in the cement division (EBITDA per tonne at Rs1,090, up 0.1% YoY) and the power division (EBITDA per unit at Rs0.24, down 73.6% YoY).
- The net revenues rose by 15% on account of higher cement revenues (the volume and realisation were up 18% and 9% YoY respectively). The power division continues to lag (the volume and realisation were down 26% and 17% YoY respectively).
- We have upgraded our earnings estimates for FY2014 and FY2015 after factoring a better volume and realisation growth. We have introduced our FY2016 estimate in this note. We believe that Shree cement is aptly positioned in the northern market to benefit from a better volume and realisation growth going ahead. However, the stock is trading at 10x FY2016E which leaves a limited upside potential. Consequently, we maintain our Hold rating with a revised price target of Rs6,010.
VIEWPOINT SKF India
Current market price: Rs816
Strong operating performance; but fully priced in Key points - Despite a single-digit growth in revenues (up 8% YoY) during Q1CY2014, SKF India (SKF) managed to post strong operating results with a margin expansion of 135BPS and earnings growth of 20.9% YoY.
- SKF has witnessed a lacklustre growth in revenues in the past two years, mainly because of a sluggish demand from both the automotive and industrial segments. However, a revival in automobile demand (post-general election), a pick-up in the industrial capex cycle and a steady demand in the replacement segment will aid SKF to post a 14% CAGR in revenues over CY2013-15.
- The stock has appreciated by close to 27% over the past three months and by around 16% since our positive report on the bearing industry (covering SKF India) on February 25, 2014. At the current market price of Rs816, the stock is trading at 20.0x and 16.5x its CY2014 and CY2015 estimates respectively (as compared with the historical average P/E of 15x). We believe the recent rally has already factored in the near-term positives of the company and investors can take home the profits.
| | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. | |
| Regards,
The Sharekhan Research Team |
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