Investor's Eye: Update - Hindustan Unilever, Telecommunications

 

Investor's Eye [June 18, 2014]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE     Hindustan Unilever Recommendation: Reduce Price target: Rs520 Current market price: Rs619   Annual report review, Reduce maintained due to premium valuation   Key points  HUL's domestic business was affected by persistent inflationary pressures and weak consumer sentiment that moderated its revenue growth from mid teens to high single digits in FY2014. The volume growth of the domestic consumer business moderated to 4% in FY2014 from about 7% in FY2013. The OPM improved by about 60BPS to 14.2% due to efficient procurement of the key inputs, stringent cost management and cut in promotional spending (in the second half of the year).  The company's operating cash cycle improved by five days with a reduction in the debtor days. The return ratios remained strong with RoE and RoCE standing at 99% and 135.7% in FY2014 (as against 83.7% and 108.8% in FY2013) respectively. The dividend pay-out remained strong at 83.4% during the year (~70% in FY2013 after adjusting for a special dividend). HUL is one of the largest FMCG companies in India with a strong distribution reach in the urban and rural markets. It has one of the strongest balance sheets with negative working capital and is also known for its consistent strong dividend payout. Banking on sustained innovation and premiumisation the company wants to derive better revenue growth in the long run. However, HUL's operating performance is expected to remain weak in the near term due to a slowdown in the sales volume of the key segments and the pressure of rising input cost on the margin of the key segments. Also, the current valuation of 30.6x the FY2016E earnings is at a stark premium to its historical average. Hence, we maintain our Reduce rating on the stock with an unchanged price target of Rs520. Key risk to our rating: possible follow-up buy-back by the parent company at a price significantly higher than the current market price.   SECTOR UPDATE     Telecommunications   May net additions up 24.4% MoM, Bharti led the pack   The Cellular Operators' Association of India (COAI) has released its subscriber base figures for May 2014. For the month, the industry (excluding Reliance Communications [RCom] and Tata Teleservices [Tata Tele] both of which also have a CDMA base) added about 6.2 million subscribers on a cumulative basis, a growth of 24.4% over the previous month. The overall subscriber base grew by 0.9% on a month-on-month (M-o-M) basis to 733.1 million subscribers.  View  The top three players (Bharti Airtel, Vodafone India and Idea Cellular) collectively hold 70% of the total subscriber market share and over 70% of the revenue market share.  We continue to believe that the telecommunications industry is likely to witness consolidation ahead with a few large players surviving. A price discipline approach in the sector would be positive for the incumbent players, while any potential destructive and predatory pricing strategy from the new entrant, Reliance Jio, would be detrimental to the industry. Bharti Airtel's fundamentals remain strong but competitive intensity (which may increase following the entry of Reliance Jio) and the new entrant's pricing strategy are the key monitorables ahead. We have a Hold rating on Bharti Airtel with a price target of Rs370. 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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