Recommendation: Buy
CMP = Rs 200
Price target: Rs 280
Result highlights:
- Hindustan Unilever Ltd's (HUL) Q3FY2007 results were below our expectations. Net sales grew by 9.7% to Rs 3,364.6 crore on the back of a 9.5% year-on-year (y-o-y) growth in HPC sales and a 16.8% growth in the sales of foods business.
- The overall operating profit margin (OPM) expanded by 16 basis points year on year (yoy) to 13.3% despite one-off adverse impact of the seven-week closure of the Assam unit that manufactures ~30% of personal products.
- The operating profit grew by 11.1% to Rs 447.6 crore. However, the net profit rose by only 6.9% to Rs 409.3 crore due to the higher tax rate of 20% in Q3FY2008 against that of 17.5% in Q3FY2007.
- Sales of soaps and detergents grew by a robust 12.8% yoy to Rs 1,572 crore and the segment's profit before interest and tax (PBIT) margin improved by 440 basis points to 16.7%. The performance of the personal product segment was affected by the strike at the Assam factory that led the PBIT margin fall by 260 basis points yoy to 24.2%.
- Sales of processed food segment grew by 32.5% yoy to Rs 128.9 crore. Modern Foods that was merged with the company contributed a major chunk to the sales growth with sales of Rs 23.8 crore. Thus the organic sales of the segment grew by 8% yoy. While the margins in the processed foods business improved, the profitability of ice cream business declined sharply on account of costs related to setting a new factory.
- The quarter witnessed the launch of water purifiers in Delhi and Uttar Pradesh thereby expanding the water purifier business to eight states. Pureit, HUL’s in-home water purifier now serves three million homes. The business is gaining ground but being in initial stages we expect it to continue its losses for the next few quarters.
- At the current market price of Rs 200 the stock is quoting at 24.9x its CY2007E earnings per share (EPS) of Rs 8.1 and 21.9x its CY2008E EPS of Rs 9.2.
- I maintain Buy recommendation on the stock with a price target of Rs 280.
