Hindustan Unilever Cluster: Apple Green Recommendation: Buy Price target: Rs280 Current market price: Rs249
Tackling surge in input cost head-on
Key points
To combat the surge in its input cost, Hindustan Unilever Ltd (HUL) has implemented a two-pronged strategy of increasing the prices of its products and cutting the pack sizes of its prominent detergent brands. The company has implemented price hikes in the range of 11-20% in its key detergent brands.
Prices of some of the key inputs in detergents, such as linear alkyl benzene (LAB) and caustic soda flakes, have increased significantly. Caustic soda prices have gone up by 35.4% to Rs31.3 per kg in August 2008, compared to Rs23.0 per kg in April 2008.
Thus, we believe that price hikes implemented by the company would partly offset the cost inflation and minimise the pressure on the margin of the soap and detergent business to some extent.
Though crude palm oil prices have softened by 25.7% (2,500 MYR per tonne at the beginning of September 2008 vs 3,363.8 MYR per tonne in July 2008), the prices of the other key inputs, such as LAB and caustic soda flakes, and auction tea have hardened significantly. We believe that the company would continue to make big investments in advertising and brand building activities to counter the launches in soap and shampoo categories from its major competitor, ITC, and to sustain its market share. Thus, the overall margin of the company would remain under pressure going forward.
At the current market price of Rs249.3, the stock is trading at 22.7x its CY2009E earnings per share (EPS) of Rs13.1. We maintain our Buy recommendation on the stock with a price target of Rs280.
Financial year 2008 proved to be a mixed year for GDL as the company's top line saw a strong growth in this period on the back of an excellent volume growth. However, a change in the revenue mix in favour of the new businesses and the lower-margin container freight station (CFS) of Punjab Conware led to a decline in the profitability of the company during the year.
Despite challenges, the company expects the growth in the container traffic to continue in FY2009 and is in the process of expanding the capacity at its CFS at Visakhapatnam and setting up a new CFS at Kochi. Its inland container depots (ICDs) at Ludhiana and Faridabad are also expected to become operational in the next couple of years. Besides, the company would continue to aggressively expand its fleet in the rail business and has already placed orders for ten more trains.
The net cash flow from operations after working capital adjustments remained healthy for the company at Rs80.75 crore. The working capital management has improved as the net working capital cycle reduced to a negative 17.5 days in FY2008 as against a positive 14.6 days last year. On account of a strong capital expenditure (capex) owing to its entry into new businesses and a decline in its profitability, the return ratios dipped during the year. The return on capital employed (RoCE) dropped by 1.9% to 12.5% while the return on net worth (RoNW) dipped by 1.3% to 11.1% during FY2008. The current debt/equity ratio is comfortable at 0.3x and despite its big capex plans, we expect the ratio to be maintained going forward.
Increased volumes in the core business, combined with the deployment of more rails on the export-import (EXIM) route, are expected to strengthen the performance of GDL going forward. At the current levels, the GDL stock is trading at 9.3x FY2010E earnings. We maintain our Buy recommendation on the stock with a price target of Rs236.
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