HLL: Robust growth

With continuing businesses growing at a smart 13.8 per cent y-o-y and operating profit margin up 50 basis points at 13.1 per cent, HLL's numbers for the September quarter are robust.

While the margin expansion was more impressive at 126 basis points in the June quarter, better volumes and a better portfolio mix have contributed to the improved top line growth in Q3CY06""in the June quarter sales grew just 10 per cent.

HLL's strategy of promoting and pushing its core brands seems to be working. Ad spends as a percentage of sales are up 230 basis points y-o-y at 11.1 per cent, far higher than the 100 basis point rise in the June quarter, and this is possibly the sixth consecutive quarter in which advertising and sales promotion growth has been higher than the sales growth.

Nonetheless, that seems to have helped the home and personal care segment grow a smart 15 per cent and post market share gains in shampoos and toothpaste.

In the June quarter, the Street had been disappointed with the 13 per cent growth in personal products, but this time round, the growth is good at 19.6 per cent. Moreover, beverages which had declined in Q2 CY06, have grown 6.7 per cent. Processed foods, on a low base, grew just 19 per cent, but turned profitable at the operating level.

The price hikes in some categories also seem to have worked as seen in the better margins. Of course, segments such as fabric wash are still not doing as well, with HLL facing both competitive and cost pressures, which are likely to continue.

The stock has underperformed the market in the last four months and trades at 32 times estimated CY06 earnings and 27 times CY07 earnings, and appears a trifle expensive, given that earnings growth is likely to be 15-20 per cent in the next two years.

Tata Steel: Margin slump

Though Tata Steel expanded its focus on the higher margin steel for the auto sector, surging input costs led to a fall in its margin in the September 2006 quarter. Its operating profit grew by 3.2 per cent in Q2 FY07, as compared to a 7.75 per cent sales growth. The operating profit margin declined 180 basis points y-o-y to 40.7 per cent in the last quarter. After the results, the stock is down 1.6 per cent.

Although not strictly comparable, Tata Steel had seen its operating profit margin fall 426 basis points y-o-y to 40.38 per cent in Q1 FY07.

During Q2, its steel sales grew marginally on a y-o-y basis to 1.18 million tonne, while realisations went up 7.35 per cent y-o-y to Rs 35,352 per tonne, thanks to sales of auto grade steel improving by 30 per cent y-o-y to 0.22 million tonne.

Senior company management said Tata Steel's expanding market share in the overall auto steel segment. However, raw materials as a percentage of net sales went up 430 basis points to 17.5 per cent largely due to higher coking coal costs, say analysts.

The company's board had earlier announced its plan to acquire UK-based Corus and once completed, it is expected to improve its geographical spread in the European market. The stock trades at 6.5 times estimated FY07 earnings, given the uncertain direction of steel prices over the next few quarters due to surging Chinese output.

With contributions from Shobhana Subramanian and Amriteshwar Mathur