HUL: Unsatisfactory

Performance of home and personal care segment was poor

Hindustan Unilever's topline growth in the September quarter has been slightly below 10 per cent y-o-y at Rs 3364.6 crore and is not exactly satisfactory even if it comes on a somewhat higher base.

The y-o-y growth in September 2006 had been relatively strong at 13.8 per cent thanks to an exceptionally good performance turned in by the FMCG segment at 14.2 per cent. In September 2007, most of the growth in the topline has come from price rise; volume growth was just 3 per cent.

With the overall expenditure increasing almost in line with sales at 9.5 per cent "" some of it thanks to higher other expenditure, which grew nearly 12 per cent "" the profit before interest and tax (PBIT) margin fell 300 basis points to 13.2 per cent. Thus, the PBIT was up just under 8 per cent at Rs 445 crore.

A significantly larger provisioning for tax "" up 37 per cent "" has meant that profit after tax (before exceptionals) has risen just 6.9 per cent to Rs 409 crore. What is disappointing is the performance of the home and personal care business, which could have grown at least in low double digits.

Especially worrisome is the poor growth in personal products at just 4 per cent y-o-y. That would explain the street's disappointment with the numbers. The strike at the company's Assam factory impacted the skin and toothpaste categories.

The good news is that the fiercely competitive soaps and detergents business has posted a 13 per cent increase on the back of price increases undertaken earlier in the year and hence HUL has gained market share of 220 basis points. However, it has lost share in personal wash despite growing sales in the quarter.

At the current price of Rs 208 the stock trades at 25.5 times estimated CY07 earnings and 23 times CY08 earnings, and appears to be expensive.

ONGC: Relief from subsidy

ONGC reported an improved performance in the September 2007 quarter helped by a lower subsidy burden on a y-o-y basis, coupled with enhanced oil production. It was also able to offset the appreciating rupee.

As a result, the company's operating profit grew 19.5 per cent y-o-y to Rs 8415 crore in the period, while its net sales rose 9.6 per cent to Rs 15,414 crore.

Its operating profit margin also expanded 460 basis points y-o-y to 54.6 per cent in Q2 FY08. In the June 2007 quarter too, its operating profit margin had increased 240 basis points y-o-y to 57.9 per cent.

Meanwhile, in the September quarter, the company's crude oil production was 7 million tonnes compared with 6.85 million tonnes in the previous year.  In addition, its gross realisation (prior to subsidy sharing) was $78 a barrel in Q2 FY08 compared with $71.6 a year earlier. Significantly, the company's subsidy burden was Rs 3,799 crore in the last quarter compared with Rs 5,032 crore a year earlier.  ONGC's net realisation after subsidies was $55.93 a barrel in Q2 FY08 compared with $45.42 a barrel a year earlier. The company's subsidy burden was Rs 3649 crore in the June 2007 quarter.  Global crude oil prices are close to historic highs, but there is the uncertainty regarding the size of ONGC's subsidy burden over the next few quarters.  As a result, ONGC will only be able to partially benefit from rising crude oil prices. At Rs 1248, the stock gets a discounting of about 13 times estimated FY08 earnings.  With contributions from Amriteshwar Mathur and Shobhana Subramanian