{LONGTERMINVESTORS} Stock Update-Hindustan Unilever, Kalpataru Power Transmission

March 31, 2016   Stock Update Hindustan Unilever Reco: Buy PT: Rs980 CMP: Rs870 Play on expected rural recovery; upgraded to Buy with revised PT of Rs980   Key points Government's revamped focus and better monsoon to revive rural demand: The government of India introduced significant measures (including higher allocation towards rural infrastructure schemes and rural employment scheme) to improve the rural economy, which was affected by two consecutive years of below normal monsoon. Further, the Australian Bureau of Meteorology, the Climate Prediction Center (USA) and the Indian Institute of Tropical Meteorology have indicated of normal monsoon season in 2016. This would result in an improvement in the agricultural production for 2016. The enhanced government's focus and higher agri-production would improve the rural economy and the rural demand for FMCG products in FY2017 and FY2018. Hindustan Unilever Ltd (HUL) will be one of the key beneficiaries of improving rural demand, as it generates close to 50% of its domestic revenues from rural India. Volume growth trajectory likely to improve in FY2017-18: Despite the subdued demand environment, HUL's volume growth stood at 6% in M9FY2016 as against 4.5% volume growth in M9FY2015. This was driven by relevant price actions (price cuts/discounts) in relevant SKUs of key brands and higher advertisement spends which aided HUL to post improvement in the volume growth over the past nine months. With expected improvement in the rural economy and better urban demand (due to the implementation of the Seventh Pay Commission and lower inflation), we expect HUL's volume growth trajectory to improve by 6-8% (from the current level of 4-6%) in the near to medium term. Also, the company's sustained focus to add new products straddling the pyramid and improving the growth prospects of packaged food segment would support the volume growth. Upgraded to Buy with PT of Rs980: In a difficult demand environment, HUL saw a 200-basis point (BPS) improvement in volume growth on the back of relevant pricing actions and sustained innovation in the product portfolio. With the rural and urban demand likely to improve, the volume growth trajectory is expected to improve and profitability is expected to improve by 40-50BPS per annum (on the back of stable raw material prices, better revenue mix and several cost saving initiatives) in the coming years. Thus, HUL is likely to achieve around 15% earnings CAGR growth over FY2015-18 (better than 12% earnings growth over FY2012-15). In view of improved earnings visibility, strong cash generation ability and higher return ratios (RoE and RoCE sustained above 100% in the last three years), we have upgraded the rating on the stock from Hold to Buy with a revised price target of Rs980 (valuing the stock at 36x its FY2018E earnings). The stock is currently trading at 32x its FY2018E earnings per share (EPS) of Rs27.2. Key risk: Any significant increase in the raw material prices and another year of below normal monsoon would be a drag on our earnings estimate.   Kalpataru Power Transmission Reco: Buy PT: Rs265 CMP: Rs204 Core T&D business on solid traction; revised PT to Rs265   Key points Core T&D business on solid traction; order book jumped substantially: The core transmission and distribution (T&D) business of Kalpataru Power Transmission Ltd (KPTL) witnessed a solid traction recently, which reinforced our belief that the earnings growth of KPTL will remain strong during FY2016-18. We expect the company's stand-alone earnings to grow at a compounded annual growth rate (CAGR) of 18% in this period. KPTL witnessed a substantially high order inflow in Q4FY2016, to the tune of Rs2,600 crore, against Rs835 crore in Q4FY2015. During FY2016, the order inflow for KPTL (stand-alone) jumped by 188% YoY to Rs7,500 crore, hence we expect its closing order book position to grow by 65% YoY in FY2016 to around Rs8,500 crore (2x its FY2016E revenue). On this backdrop, we estimate its revenue to clock a 15% CAGR in FY2016-18 and double-digit operating profit margin in T&D business to remain intact. Further, with a visible improvement in margin of other (pipeline and railways) businesses, we expect earnings to register an 18% CAGR during FY2016-18. Asset monetisation drive is on but disappointment on SSL front: Apart from the strong earnings outlook of KPTL (stand-alone), its construction subsidiary JMC Projects is on a steady track of margin improvement. After consistent margin improvement in the last couple of quarters, the management aims to inch up operating margin further to around 8.5%. Also, the management intends to monetise build-own-operate-transfer (BOOT) road projects under JMC Projects at appropriate time. Further, monetisation of real estate assets continues; 60% of the Thane-based commercial property has been leased and 30% is being sold and remaining 10% is likely to be monetised soon. The company has also launched its residential project in Indore few days ago. However, on the negative side, a sharp drop in the operating performance of Shree Shubham Logistics (SSL) and the unclear prospect of its listing plan is a drag. Revised price target with rolling over multiple to FY2018 earnings; Buy: The stock has corrected sharply in the last couple of months on the back of general market weakness and below expected result in Q3FY2016. The softer Q3FY2016 result was a reflection of weak order inflow in the past, however the order inflow scenario improved substantially in Q4FY2016 as guided by the management. The order backlog position stands much better now than last year. Hence, we expect a very healthy earnings growth during FY2016-18. In the meanwhile, the stock has corrected by around 20% in the recent past and currently it is trading at 13x its FY2018E stand-alone earnings (introduced FY2018 earnings estimate in this note). Therefore, we have rolled over our target multiple to FY2018 earnings and revised our price target to Rs265 (earlier Rs245) and retained our Buy rating on the stock.     Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. Regards, Sharekhan Fundamental research team www.sharekhan.com

--
You received this message because you are subscribed to the Google Groups "LONGTERMINVESTORSRESEARCH" group.
To unsubscribe from this group and stop receiving emails from it, send an email to longterminvestorsresearch+unsubscribe@googlegroups.com.
Visit this group at https://groups.google.com/group/longterminvestorsresearch.
For more options, visit https://groups.google.com/d/optout.