HLL: Flat numbers

There's hardly any improvement in HLL's performance

The Hindustan Lever stock rose 4 per cent on Thursday, much higher than the 1 per cent increase in the Nifty. Evidently, the markets seem relieved that HLL's net profit didn't fall as badly as in the June quarter.

Last quarter, profit before tax and exceptionals fell 31.7 per cent, better than the 42.6 per cent fall reported in the June quarter. Also, the operating margin improved to 14.1 per cent last quarter, compared to just 12.4 per cent in the June quarter.

However, in reality, there's hardly any improvement in HLL's financial performance. The improvement in operating margin is simply because ad spend was cut from 10 per cent of sales in the June quarter to 8.2 per cent last quarter. If ad spend was maintained at the June quarter levels, the decline in PBT would be 40 per cent.

Little has improved in the soaps and detergents segment, where sales were only marginally higher (up 3.8 per cent), despite the significant cut in prices. Also, EBIT margins of the segment were 14.8 per cent, almost the same as the June quarter level of 14.5 per cent.

Even in the shampoo segment, while volumes have jumped by 40 per cent because of price cuts, sales have grown just 3 per cent in value terms. The point is that the top line is still stagnant, despite significant price cuts in key segments. Worse still, the processed foods business reported a 38 per cent drop in sales, and is proving to be a drag on the topline.

True, the year-on-year drop in profit would cease after two quarters when the low base catches up. But it's the outlook on top line growth that's still worrying, especially since the HLL stock still enjoys a valuation of over 18 times estimated CY2005 earnings. What's working for the HLL stock is that when it falls below Rs 110, it offers an attractive dividend yield of 5 per cent.

Bharti Tele

Bharti Televentures' consolidated revenues in the September quarter rose by an impressive 9 per cent to Rs 1,859.8 crore, compared with the June quarter.

EBITDA, too, increased 13 per cent sequentially to Rs 701 crore, with the EBITDA margin rising to 37.6 per cent from 36.6 per cent in the June quarter. Clearly, the economies of scale are kicking in with the increasing number of subscribers.

However, EBITDA margins for Bharti's mobile services business at 34 per cent were down from 35 per cent in the June quarter, although revenues from the segment grew 12.8 per cent to Rs 1239.7 crore over Q105.

The lower margins were because of tariff cuts and a roll-out of mobile services in new cities. Despite the significant cut in tariff last quarter, ARPUs (Average Revenue per User) fell only by a per cent to Rs 509 from Rs 515.

This was because of a higher proportion of post-paid customers to total customers, which moved to 23 per cent last quarter from 22 per cent in the June quarter, and an increase in MoUs (minutes of usage). Last quarter, the MoU was 320 compared with 309 in the June quarter.

Bharti has done well to bounce back from the lacklustre performance in the June quarter, when consolidated profit had fallen 2.6 per cent sequentially.

While it looks set to report an EPS of Rs 8 in FY05, analysts now expect an EPS of Rs 12 for FY06. Given the growth prospects, the Bharti stock is reasonably valued at 13 times estimated FY06 earnings.

With contributions by Mobis Philipose and Shobhana Subramanian