HLL: Look for excellent Q4 results
March quarter profit forecast to rise 43% Y-o-Y
After a very difficult period in the last few years, we expect HLL to rebound in 1Q2006 with profit growing an estimated 43% underpinned by sales growth of 16% and EBIT margin expansion of 270bp to 11.2%. We expect Personal Products tobe the star category, with sales growing 35% and EBIT growing 58%.
Booming demand and price increases underpin growth
HLL is benefiting from improving consumer demand across categories led by growing income levels. Further, pricing power is returning with easing competitivepressures from Procter & Gamble. We believe the product mix is also beginningto improve, which is further aiding margin expansion.
Estimates upgraded by 3-4% in 2006 and 2007
HLL's recent price increases (~10% in some skin care products, ~5% in somedetergent brands and ~10% in most Lifebuoy soap brands) have led us toincrease our EPS estimates by 3-4%. We now forecast EPS to grow 28% in 2006 to Rs7.6 and 23% in 2007 to Rs9.4.
Price objective raised to Rs345
We expect HLL's stock price performance to be supported by improving profitoutlook, stable competitive position and management's greater focus on product quality and innovation. Though the stock has been sharply re-rated to P/E of36.8xDec06E, we expect valuation to sustain given booming consumer demandand also relative under-ownership (FII holding of ~14% versus 20% plus for most of the Sensex companies).
Our PO of Rs345 is based on rolling forward our2006E P/E to 2007E.
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Source: Merill Lynch
