Investor's Eye: Update - Hindustan Unilever, Bank of Baroda

 

Investor's Eye [October 03, 2013]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE Hindustan Unilever Recommendation: Reduce Price target: Rs540 Current market price: Rs609 Discretionary spending remains under pressure Key points Unilever sees slowdown in emerging markets: Unilever Plc has indicated that the sustained slowdown in the emerging markets (which contribute around 60% of Unilever's total revenues) would affect its overall financial performance in the September 2013 quarter. It expects the underlying sales growth to drop to 3.0-3.5% in the September 2013 quarter from 5% in the June 2013 quarter. For Unilever, India is one of the key emerging markets where it is facing tremendous pressure on sales volume, which has tapered down to 4% in Q1FY2014 from 9% in Q1FY2013. This is largely on account of sustained inflationary pressures and growing macro-economic concerns that have affected consumer sentiment and consequently influenced their buying decisions. HUL to post a subdued performance in Q2FY2014  We expect HUL to post a dismal performance in Q2FY2014 with revenues growing by 9.6% year on year (YoY) to Rs6,745.8 crore and the adjusted profit after tax (PAT) growing by just 3.1% to Rs830.6 crore. The volume growth of the domestic consumer business would be around 5% for Q2FY2014.  We expect the core home and personal care (HPC) business to grow at approximately 6% YoY to Rs5,198.5 crore in Q2FY2014. The soap and detergent segments together are expected to grow by 6% YoY (largely driven by higher volumes) while the personal care segment is expected to grow by around 5% YoY during the quarter. The beverages segment is expected to grow by 17% YoY to Rs841.9 crore during the quarter. The palm oil prices are down by 15% YoY to around 2,400 Malaysian Ringgits per tonne. However, the rupee's depreciation by around 15% has resulted in higher import price for palm oil. We believe the larger impact of the rupee's depreciation on the gross profit margin (GPM) could be seen in the coming quarters. On the other hand, some of the other key inputs such as tea, coffee, caustic soda (flakes) and soda ash have remained lower on a year-on-year (Y-o-Y) basis. Hence, we expect the GPM to improve by around 57 basis points in Q2FY2014 to 47.5%. Though we expect the advertisement spending to remain higher at around 13% of the total sales, we expect the operating profit margin (OPM) to remain flat at around 13.5% in Q2FY2014. The operating profit is expected to grow by 10.9% YoY to Rs911.1 crore. However, a lower other income and a higher incidence of tax would lower the PAT growth to 3.1% YoY or Rs830.6crore. Maintain Reduce on the stock: Since our thematic switch (from HUL to Colgate-Palmolive India) report on September 24, 2013, HUL's stock price has reduced by about 5%. At the current levels the stock is trading at 36.9x its FY2014E earnings per share (EPS) of Rs16.5 and 33.8x its FY2015E EPS of Rs18.0 (which is still ahead of the historical five-year average multiple of 27x). In view of the near-term pain due to its weak business fundamentals and premium valuation, we maintain our Reduce rating on the stock with a price target of Rs540. We prefer a stable stock like Colgate-Palmolive India, which has better earnings visibility and a strong balance sheet.   Bank of Baroda Recommendation: Buy Price target: Rs600 Current market price: Rs525 Ahead of the pack We interacted with the management of Bank of Baroda (BOB) to get an outlook on the asset quality and the impact on the net interest margins (NIMs) in the light of hardening of the interest rates. The key positive takeaways include (a) the domestic NIMs may improve to ~3% led by the reduction in the high cost bulk deposits; (b) slippages may remain closer to Q1FY2014 levels (ie ~Rs2,000 crore) in Q2FY2014 and would taper from H2; and (c) limited impact on investment book due to leeway given by the Reserve Bank of India (RBI; ie transfer from available for sale [AFS] to held to maturity [HTM] based on yields in July 15). On the flip side, the restructuring pipeline is still concerning and the restructured loans will continue to mount over the next couple of quarters. After the interaction, we have trimmed our estimates for FY2014 and FY2015 to factor a 10-15-basis-point impact on the NIMs. Consequently, the return on asset (ROA) is expected to decline to 0.75% in FY2015 from 0.9% in FY2013. We have revised our price target to Rs600 (0.8 x FY2015 adjusted book value) in line with our revised estimates. Though we have a negative outlook on the public sector undertaking (PSU) banks, we prefer BOB due to its relatively better asset quality, healthy capitalisation (tier 1 capital adequacy ratio [CAR] of 9.7%) and reasonable valuations. Any negative surprise on the asset quality front is a risk to our call. Price target revised downwards, Buy maintained Though we have a negative outlook on the PSU banks, we prefer BOB due to its relatively better asset quality and reasonable valuations. The bank has a healthy CAR of 12.7% (tier I CAR of 9.7 %) and is not too keen for a capital infusion by the government. We have reduced our earning estimates for FY2014 and FY2015 to factor the pressure on NIMs and higher provisions. We maintain our Buy rating though the price target has been revised to Rs600. The stock trades at a premium to other PSU banks (except State bank of India) due to a relatively better asset quality and capitalisation. Therefore, negative surprises on asset quality are a risk to our call. Click here to read report: Investor's Eye   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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