HUL: Rich lather

Growth has been strong in soaps and detergents rather than personal care.

Hindustan Unilever's (HUL) operating profit growth of 23.5 per cent y-o-y to Rs 512 crore for the June quarter has been its highest in about six years.

Driven by an 11.1 per cent rise in the health and personal care (HPC) category, HLL's top line has grown a smart 12.9 per cent y-o-y to Rs 3481.4 crore.

While the growth in the HPC category has been driven more by a strong growth in soaps and detergents rather than personal care, the management has attributed this to the de-stocking of brands in the skin care category owing to a re-launch.

The volume growth during the quarter has been about 6 per cent, implying that the price increases in the last six months have paid off and not impacted demand.

At the same time, the management has succeeded in containing costs-raw material costs as a percentage of sales are flat at 53.3 per cent and adspend too was down 155 basis points.

It appears that the days of unusually high spending on advertising might be over and that these might be moderating. This could be true for other costs too so looking ahead, cost pressures might subside.

The strong top line and the lower rise in costs in the June quarter have resulted in an expansion of the operating profit margin by 120 basis points y-o-y to 14.7 per cent. For the year as a whole, operating margins could be in the region of 12-13 per cent.

The company has announced a buyback up to Rs 230 a share for an aggregate Rs 630 crore. While there could be a small dilution in the earnings because of the lower non-operating income, it would be very small and the improvement in the business would more than compensate for that. As such there is little point in tendering the shares at this point.

It is also possible that HUL might continue with the buyback in subsequent years too. At the current price of Rs 208, the stock trades at just over 25 times estimated CY07 earnings and is reasonably valued.

Tata Steel: Slack sales hurt

Tata Steel reported lacklustre standalone results for the June 2007 quarter and that was largely owing to reduced steel sales on a y-o-y basis.

As a result, the company's standalone operating profit grew 7.5 per cent y-o-y to Rs 1699.17 crore in Q1 FY08, broadly in sync with a 7.6 per cent growth in net sales to Rs 4197.58 crore.

Its operating profit margin was also steady at 40.5 per cent in the last quarter. Competitor SAIL saw its margin decline 130 basis points y-o-y to 29.6 per cent in Q1 FY08.

The results were below analyst expectations and the stock declined 0.66 per cent to Rs 647.3 on Monday. During the quarter, Tata Steel sold 1.04 million tonne as compared with 1.12 million tonne a year earlier. The management attributes the decline in saleable steel output to a planned shutdown of certain facilities for upgradation.

Tata Steel's realisations were estimated at Rs 36,664 per tonne in the June 2007 quarter, a growth of 18.3 per cent y-o-y. A Rs 553.02-crore forex gain in the last quarter, helped Tata Steel's profit before tax rise 34.3 per cent y-o-y to Rs 1902.5 crore.

SAIL's realisations were estimated at Rs 32,157 a tonne in the last quarter, a growth of 4.2 per cent y-o-y. Tata Steel's focus on auto grade steel brings better realisations and margins than SAIL.

Tata Steel will announce its consolidated financial results including Corus for the June 2007 quarter, by the end of August. Meanwhile, spot domestic steel prices have shown a downward trend, given the appreciating rupee. However, cost synergies should help Tata Steel minimise the impact. The stock trades at 9.5 times estimated FY08 earnings.

With contributions from Shobhana Subramanian and Amriteshwar Mathur