HLL: No value for money

Increased packaging and freight costs may cap HLL margins

HLL's numbers for the June quarter are fairly good given that the topline for continuing businesses is up 10 per cent and the operating profit margin is up 130 basis points, thanks to some price increases.

However, the market, it appears, has been disappointed with the performance of the Personal Products (PP) segment, which grew just over 13 per cent and beverages which declined 4 per cent during the quarter.

Besides, there are concerns that increased packaging and freight costs could cap margins given that there is limited pricing power. That's possibly why the stock fell 4 per cent in Monday's trading.

All key categories within the home & personal care (HPC) segment""which increased 13 per cent"" have grown.

HLL has maintained share in the shampoo and personal wash segments, but the fall in the value shares of laundry, skin care as also toothpaste is disappointing.

Moreover, shampoos, which had been growing in double digits in the past few quarters, have not done as well in the June quarter.

The management ascribed growth in some categories to a higher base effect despite the fact that penetration in these segments is not very high. While the processed foods division has grown 24 per cent, it is on a very small base. The same is true for ice-creams.

Beverages have declined because of the tea segment, where the company's value share dropped to 29.1 per cent from 29.9 per cent. The management says the market as a whole has not been growing since it is a mature category and a price-sensitive one.

HLL has relaunched several products recently including Lifebuoy, Taj Mahal Tea, Sunsilk, Kissan and Surf Excel.

As a result, spends on advertising and promotion have gone up by 100 basis points in the quarter though the management says some part of it is due to media inflation. To maintain and grow market shares, HLL will have to continuously spend on advertising.

At the current price of Rs 232, the stock trades at nearly 32 times CY06 estimated earnings and 26 times CY07 earnings and appears a trifle expensive, given increasing cost pressures.

BHEL : French push

The upturn in the power capex cycle has helped BHEL grow its operating profit by 85.5 per cent y-o-y to Rs 318.2 crore in the June quarter, as compared to a 37.17 per cent growth in adjusted net sales to Rs 2,656.4 crore. In addition, the company's operating profit margin has expanded 315 basis points y-o-y to 12 per cent in Q1 FY 07.

Growth in margins has also been aided by raw material costs as a percentage of net sales falling 386 basis points y-o-y to 58.5 per cent in the last quarter.

Earlier, ABB had grown its operating profit margin by 130 basis points y-o-y to 10.46 per cent in the June 2006 quarter.

The BHEL stock has moved in tune with the market over the past three months""it has fallen 13.2 per cent during this period as compared to an 11 per cent fall in the Sensex. In its key power division, segment revenue has expanded 35.7 per cent y-o-y to Rs 2,182.8 crore in Q1 FY07.

The company had signed a technology transfer agreement with Alstom, France, for advanced boiler technology in Q2 FY06, which has enabled BHEL to widen its products range.

As a result, BHEL was also able to build 800-1000 MW generating units. The firm's outstanding order book amounted to Rs 39,300 crore at the end of the June 2006 as compared to Rs 30,600 crore a year earlier.

The company is once again expected to leverage the buoyancy in the capex cycle. However, with the stock trading at about 23 times estimated FY07 earnings, there is little room for further upside.

With contributions from Shobhana Subramanian and Amriteshwar Mathur