Recommendation: Buy
CMP = Rs 231
Price target: Rs 280
Key points:
- The revenue of Hindustan Unilever Ltd (HUL) grew by 13.3% yoy to Rs 13,717.8 crore in CY2007 contributed by an increase in its volumes, a better product mix and price hikes effected during the year. Active cost-cutting measures across segments and prudent price hikes led to a 130-basis-point improvement in the company's OPM to 13.7%. The net profit of the company increased by 14.9% to Rs 1,769.1 crore.
- The home and personal care business comprising soap & detergent and personal care products (contributing around 73% to the total revenue) continued to show a double-digit growth of 12.2% yoy to Rs 10,046.4 crore. The food business posted a strong growth of 20.4% yoy to Rs 2,231.1 crore. The company's innovative and strong brand building capabilities have resulted in strong growth of 15.2%, 39.8% and 17.2% in its beverages, processed foods and ice cream sales respectively.
- Exports were affected by the appreciation of the rupee and grew by 5% in rupee terms as against a growth in excess of 15% in dollar terms. The company is rationalising its product portfolio by exiting from low-value businesses to improve the performance of the export business going forward.
- HUL completed the buy-back of 3.02 crore shares from the open market at an average price of Rs 207.13 per share, leading to an outflow of Rs 626.27 crore in CY2007. The equity capital reduced by 1.37% to Rs 217.7 crore. Total reserves declined from Rs 2,502.81 crore to Rs 1,221.49 crore in CY2007. This has led to a hefty improvement in the return ratios. While the return on capital employed improved from 72.6% to 102.2%, the return on net worth improved from 61.2% to 85.0% in CY2007.
- Better business performance, efficiencies through cost savings across segments and an efficient collection system resulted in strong operating cash flows of Rs 1,710.5 crore. Nitin Paranjpe (ex-executive director of the HPC segment) has been appointed as the managing director and chief executive officer (CEO) of the company.
- At the current market price of Rs 231, the stock trades at 24.8x its CY2008E earnings per share (EPS) of Rs 9.3.
- I maintain Buy recommendation on HUL with a price target of Rs 280.
