PRIME FOCUS LTD : CREATING A WHOLE NEW WORLD !!!

Scrip Code: 532748 / PFOCUS

CMP:  Rs. 48.35; Buy at current levels.

Short term Target - Rs. 53.00; Medium to Long term Target – Rs. 70; STOP LOSS – Rs. 44.50 Market Cap: Rs. 719.77 Cr; 52 Week High/Low: Rs. 64.15 / Rs. 37.10.

Total Shares: 14,88,67,446 shares; Promoters : 7,57,87,712 shares –50.91 %; Total Public holding : 7,30,79,734 shares – 49.09 %; Book Value: Rs. 21.93; Face Value: Rs. 1.00; EPS: Rs. 2.14; Div: NIL % ; P/E: 22.59 times; Ind P/E: 29.86; EV/EBITDA: 17.43.

Total Debt: Rs. 116.22 Cr; Enterprise Value: Rs. 1,211.15 Cr.

PRIME FOCUS LTD: Prime Focus Ltd was incorporated as in 1997 and is based in Mumbai, India. Prime Focus Limited, a visual entertainment services company, provides creative and technical services to the film, broadcast, advertising, and media industries primarily in India, the United States, the United Kingdom, and Canada. The company offers various services, including on-set supervision, production assistance, motion control, data lab, VFX, animation, motion graphics, animatics, pre visualization, image science, digital intermediate, telecine, editing, audio, stereo 3D post, versioning, duplication, encoding, DVD authoring, digital distribution, restoration, digital archiving, and digital YCM services. It also provides CLEAR, a hybrid cloud multi-platform content operations solution that enables the management of content operations, such as content preparation and processing, content management, content production, multi-platform content delivery, and rights management and monetization. In addition, the company offers View-D, a system for the conversion of 2D moving images to stereo 3D images; SPF WORLDVERSIONING, a service to assist with the smooth rollout of global and media marketing campaigns; and CLEAR CPM, which is a campaign management tool that provides interface for TV, online, and print management delivery. Further, it is involved in the digital content management, camera rentals, media and other investments, and post production of television commercials; and digital asset management, as well as provision of graphics for feature films. The Company is compared with Balaji Telefilms ltd and with Eros International Media Ltd , DQ Entertainment International Limited, Crest Animation Studios Limited, Colorchips (India) Limited   locally and with British Sky Broadcasting, Antena 3 de Television SA, Meredith Corp, ITV PLC, Mediaset SpA, Time Warner, News Corp, Walt Disney Co, Lagardere SCA, Aegis Group and RealD Inc globally.

Investment Rationale:

Prime Focus Ltd is a  global visual entertainment company in the technical services in film & entertainment industry that offers end-to-end services ranging from pre-production to final delivery including visual effects, three dimension conversion, animation. Prime Focus Limited generates revenue about 40.6 % from the 2D to 3D conversion; about 19.3 % comes from Visual Effects (VFX); Post production contributes about 35.8 % in the revenues and finally the Content Infrastructure Management contributes about 4.4 % to the revenue of PFL. Prime Focus Ltd (PFL) is a global visual entertainment services company providing end-to-end services ranging from visual effects (VFX), 3D conversion and complete post-production services to a worldwide clientele and has worked in 10 of the world’s top 30 blockbusters movies in the past three years. Over the years, it has successfully acquired companies in the UK and North America, turned them around and consolidated its position in the global market. It has operations in North America, UK and India and has built a ‘state-of-the-art’ facility at Royal Palms, Mumbai, and Chandigarh with 3,000+ seats to convert existing 2D films to stereoscopic 3D format. It has 15 global facilities with total employee base of 4,500. PFL’s VFX business is witnessing strong growth and they are focused on continuously increasing their share in $5 billion market by making investments in Vancouver and London. In FY12, the VFX business contributed Rs. 149.30 Cr to the top line, which is an 80% increase over the previous year and is expected to grow at 33% in the coming years. PFL is the market leader in the 3D conversion business with a market share of nearly 50% and few international competitors, thus enjoying a benefit of off-shoring resulting in higher margins of nearly 40% at EBIDTA level and is targeting a 30% growth in FY13E and FY14E. Considering the strong potential of these business vertical, we expects it to be a major growth driver for the company going forward. PFL offers a cloud based technology platform CLEAR through its subsidiary prime focus technologies (PFT) to the media and entertainment industry. It helps manage content, workflows, supply chain logistics, interactions, and production and operations management tool for clients like Associated Press, British Films Institute, Sony Music, Netflix, Viacom, and National Geographic Channel. CLEAR is the world’s first hybrid Cloud technology platform managing over 150,000 hours of content for Broadcasters, Studios & brands worldwide. It has registered robust growth of 205.3 % y-o-y in FY12 (contributed 4.4 % to revenues) and stood at Rs 33.60 Cr. We expect the platform to grow at 100 % in FY13 to Rs 70 Cr on account of its strong order book of US$ 12 mn executable in the next 12-18 months.

Outlook and Valuation:

Prime Focus Ltd’s current order book is about $90 million, which is executable over the next 18 months and is bifurcated into the conversion business and CLEAR, with 2D to 3D conversion and VFX accounting for $80 million and CLEAR comprising of the remaining $12 million. In addition, PFL has an order book of $150 million in the pipeline from a long term perspective of 4-5 years which provides revenue visibility. 

Major Contributor in Hollywood blockbuster Movie "Avatar"  :

Prime Focus Added Graphic Dimension to ‘Avatar’ 

PRIME FOCUS had contributed a number of shots to James Cameron's stereoscopic 3D feature film "AVATAR" which featured numerous stereo graphics & 'Holotable' displays, animated graphics for immersive environments and other visual effects which were created by PRIME FOCUS. Its VFX team created displays called Immersives that provided a 180 degree stereo perspective allowing actors acting as military personnel to control air traffic flow in 3D. The recent KPMG report anticipates the market size of Indian Music & Entertainment sector to touch Rs 1,45,700 Cr (US$ 25.51 billion) by 2016. It is expected that the PFL’s revenues and profitability can grow at a CAGR of 29.7 % - 33.9 % to Rs. 1300 Cr over FY12-14E driven by strong order book in the 2D-to-3D conversion space, traction in CLEAR platform and expansion in margins. It is expect that the company to witness robust traction and value unlocking in the US and UK business which contributes 85 % to total revenues. The company operates at healthy EBITDA margins of 30% which we expect to expand going forward with the increase in revenues from non linear streams like 3D-VFX and CLEAR platform which fetch higher margins. There are only 68 movies in the world which are available on 3D and there is huge opportunity left in this space. The cost of converting a movie from 2D to 3D ranges between $10 million to $15 million while in return it fetches huge cash flows due to higher ticket prices, no piracy and lower distribution costs. Further, with rise in demand for 3D Movies, the current growth momentum is expected to continue in the next two years. PFL’s track record of providing various technological offerings to content owners through efficient execution has led to clients like Warner Bros, 20th Century Fox, Sony etc become a part of its global clientele PFL enjoys a leadership position in the 3D conversion business with a global market share of 50 %. PFL’s off shoring advantage enables it to operate at higher margins as compared to its global peers and hence provide it a competitive advantage. Global network of integrated studios provides time and cost benefits to clients, giving PFL and edge over competitors of FY15E. PFL has set up 3000+ seat capacity ‘View D’ technology center at Goregaon Mumbai and Chandigarh locations to cater to the outsourcing need of 3D conversion and VFX Global strategic client base like Warner Bros., DreamWorks Animation, Paramount, Twentieth Century Fox, Walt Disney, Summit Entertainment PFT. The concerns would be the FCCB's which would raise debt levels to Rs. 434.6 Cr. The company to decide in the EGM today to issue & allot on preferential basis warrants not exceeding 2,01,12,164 in number representing the right to subscribe to 2,01,12,164 equity shares of face value of Re.1 for an aggregate amount of Rs. 104 Cr. The company trades at a P/E of 5.9x times its FY13E earnings which is believe is at a steep discount to its peers, considering its higher return ratios RoE of 29.3 %, robust revenue and PAT CAGR for FY12-14E, expanding margins and immense growth potential in 2D-3D conversion market space and strong global presence. In my view PFL could report FY13E EPS of Rs. 7.90/sh and for FY 14E of Rs. 10.60/sh. The stock could be bought for the target price of Rs. 54 & recommend to Accumulate the stock on every dip.

KEY FINANCIALS	FY11	FY12	FY13E	FY14E
SALES (Rs. Crs)	503.00	771.90	1,007.20	1,294.90
NET PROFIT (Rs. Crs)	76.10	99.20	132.80	178.00
EPS (Rs.)	5.30	6.10	7.90	10.60
PE (x)	24.14	7.90	5.90	4.40
P/BV (x)	2.34	1.60	1.90	1.30
EV/EBITDA (x)	18.43	5.00	4.50	3.20
ROE (%)	29.80	23.70	29.30	35.70
ROCE (%)	13.90	13.70	16.30	17.30

I would buy PRIME FOCUS LTD with a price target of Rs. 54 for the short term and Rs. 85 for the 6 month target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 44.50 on your every purchase


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MCX : MULTI COMMODITY EXCHANGE - India's New Stock Exchange !!!

Q 2 RESULTS ON 2nd November 2012 !!!

Scrip Code: 534091 / MCX

CMP:  Rs. 1384.20; Buy at Rs. 1375 - 1385 levels.
Medium to Long term Target – Rs. 1440; STOP LOSS – Rs. 1274.00; Market Cap: Rs. 7,059.19 Cr; 52 Week High/Low: Rs. 1446.95 / Rs. 838.00

Total Shares: 5,09,98,369 shares; Promoters : 1,32,59,575 shares –26.00 %; Total Public holding : 3,77,38,794 shares – 74.00 %; Book Value: Rs. 195.52; Face Value: Rs. 10.00; EPS: Rs. 56.12; Div: 240 % ; P/E: 28.02 times; Ind P/E: 26.67; EV/EBITDA: 14.02.

Total Debt: Rs. ZERO Cr; Enterprise Value: Rs. 7,059.19 Cr.

Multi Commodity Exchange Of India Ltd: MCX was incorporated as a private limited company on April 19, 2002 in Mumbai, India. Multi Commodity Exchange of India Ltd (MCX) is a state-of-the-art electronic commodity futures exchange. The demutualised Exchange has permanent recognition from the Government of India to facilitate online trading, and clearing and settlement operation for commodity futures across the country.  MCX holds a market share of over 85 % as on March 31, 2012 of the Indian commodity futures market. The Exchange has more than 2,710 registered members operating through over 3,46,000 including CTCL trading terminals spread over 1,577 cities and towns across India. MCX was the third largest commodity futures exchange in the world, in terms of the number of contracts traded in CY2011. The Exchange is the world's largest exchange in Silver and Gold, second largest in Natural Gas and the third largest in Crude Oil with respect to the number of futures contract traded. MCX was the first exchange in India to initiate evening sessions to synchronise with the trading hours of global exchanges in London, New York and other major international markets. It was the first exchange in India to offer futures trading in steel, crude oil, and almond. Among international alliances, MCX have formed strategic alliances with a number of exchanges such as the London Metal Exchange, the New York Mercantile Exchange, the LIFFE Administration and Management (under renewal), the Baltic Exchange Limited, Shanghai Futures Exchange and Taiwan Futures Exchange. MCX holds 5 % in Dubai Gold and Commodity Exchange and the book value of this investment was Rs. 2.185 Cr as of December 31, 2011; 100 % in MCX Clearing Corporation Ltd; 5 % in MCX SX; 26 % in MCX-SX Clearing Corporation Ltd; 51 % in SME Exchange of India Ltd with initial investment of Rs. 5,10,000. MCXIL is compared with Financial Technologies (India) Ltd in India, Ichiyoshi Securities Co Ltd of Japan, Osaka Securities Exchange also from Japan, CME group, Intercontinental Exchange Inc, Nasdaq OMX Group/THE, CBOE Holdings Inc, London Stock Exchange Group, TMX Group Inc, Deutsche Boerse AG, Bolsas Y Mercados Espanoles, ASX Ltd, Singapore Exchange Ltd, Hong Kong Exchange & Clearing House Ltd, Bursa Malaysia BHD

Investment Rationale:

Multi Commodity Exchange of India (MCX) is a state-of-the-art electronic commodity futures exchange, with near monopolistic market share of 86 % in FY12. MCX enjoys a competitive edge, given that its trading platform is supplied by its promoter, Financial Technologies India (FTECH), which is a leading developer of exchange related software and technology. Technology for the exchange industry is difficult to replicate, and this provides the company with a competitive advantage. Exchanges require constant technology upgrades and support, necessitated by regulatory regime and market forces. MCX is able to obtain speedy and efficient technology solutions from FTECH. MCX’s current technology infrastructure is sufficient to handle daily trading volumes of up to 10,000,000 in a day. So far, it has handled a high of 1,867,612 trades in a day. MCX has 2,170 members and 346,000+ terminals including computer-to computer links (CTCLs) spread over 1,577 cities and towns across India as at the end of FY12. The number of terminals has increased from 117,000 in FY10. Healthy terminal additions partially offsets the risk of lower volumes traded per member, with gradual ramp-up in volumes expected from new additions. Being the largest commodity exchange in India, with near-monopolistic market share, MCX is the key source of data on commodity trends. This gives MCX the opportunity to benefit from new non transaction revenue sources like market data product and information offerings.  This not only provides scalability to the business model, but also offers potential for growth with limited incremental costs. Growth in commodity markets facilitate demand for better trading and analytical tools, risk management tool, market data products and price information offerings which could be new revenue streams. Globally, exchanges derive 10% - 15 % of their revenues from such services. Indian exchanges do not match that number, especially in equities, given weak acceptance of algorithmic trades. MCX is better placed to garner revenues from such sources, given its speedier execution in such trades, which already constitute significant proportion of the company’s volumes. To facilitate the same, MCX has entered into agreements with financial information service agencies to provide real time data-feed on trading prices, trading volume and other information on the Exchange and on the spot market. The company currently has such arrangements with the following entities: Bloomberg Finance L.P.; NewsWire 18 Private Limited; IQN Data Solutions Private Limited; Reuters India Private Limited; Interactive Data (Europe) Limited and TickerPlant Limited. It is expected that it will sustain its market leadership which is steamed up from its technological edge and future readiness. MCX's volumes have grown at a CAGR of 47 % over FY07-FY12. Future potential remains exciting given that government on 4th October cleared the new FCRA Bill which seeks to provide complete autonomy to the commodities FMC and introduce new categories of products, with MCX having 20 lakhs client accounts as compared with 1.9 Cr – 2 CR Demat accounts, the industry has only scratched the surface with respect to potential volumes.

Outlook and Valuation:

MCX-SX, promoted by MCX and FTECH, was recently cleared to become a full-fledged stock exchange. Like BSE and NSE, it can now start trading in equities, equity derivatives and other asset classes. Currently, MCX-SX only offers trading in currency futures contracts, but soon MCX-SX intends to have a dedicated platform for small business, and hopes SME's should aspire to raise upto US$ 20 million annually through such platforms. There are at least 1% of the 30 million SME's which have strong balance sheets to get AAA rating and can look at raising money from the primary market, many SME's depend on informal system for their financing needs, paying upto 2% per month for debt & in spite of a such a high cost of servicing debt, the business continues to remain competitive & wonder quantum of benefits which will accrue if they shift to formal way of finance and access the Equity Markets. Private equity, Venture Capital and Angel Funds will invest in such companies only if they are confident of an exit route which can be made easy by the formally platforms like exchanges..

MCX-SX announced its flagship index of MCX Stock Exchange (MCX-SX) known as ‘SX-40’ which will be a free float based index of large market cap and liquid stocks representing most important sectors. MCX-SX will collaborate its indices with the initiatives support from the sources like Indian Statistical Institute – India’s premier research institute, FTSE, London and FTKMC in creating various domestic and global indices. This partnership will help MCX-SX to create new indices that will enable domestic and global investor to track, analyse and invest in India’s dynamic financial markets. The value from MCX-SX is more definite than merely option value, considering this FY14 is expected to be first full year with operations in currency and equities. MCX-SX Equity Stock Exchange is in competition with BSE & NSE. The Bombay stock exchange had a legacy of 132 years in India, a reliable brand, with the letters almost becoming synonymous with investing in India. However, all this was till NSE came onto the scene in 1992. Being a relatively new entity, NSE was nimbler and more receptive to innovation. While it was difficult for NSE to carve a niche initially, but quickly realizing the importance of IT and innovative products to meet the growing sophistication of the financial markets, NSE raced ahead to rule market share charts. However the share of it has continued to improve even after the shift of balance in power is reflected in the turnover metrics on the two exchanges since FY01. MCX-SX, with its parentage of Financial Technologies, has access to technology and management having experience of operating exchanges successfully across the globe will successfully be able achieve its share of market pie. On valuation side - NSE received a valuation of Rs. 17,100 Cr in the last known stake sale which happened in December 2011, which discounted its FY12 revenues by 11x . This is at par with the Price/Sales ratio that Singapore enjoys. MCX-SX had revenues of Rs. 39.1 Cr in FY11. However, the levying of transaction charges in currency futures had commenced only from August 2011, implying that in FY12, the company had 7 months of additional income in the form of transactional charges in FY12. Going by the volumes and rate card, this translates into Rs. 41.5 Cr of revenues from transaction charges, and even if we assume that other sources of income reduced as member additions may have fallen, FY12 revenue would still be higher than Rs. 60 Cr. Given the low base and high growth, the valuation multiple could be higher, so discounting FY14E the revenue is estimated at Rs. 130 Cr by 11x, to arrive at a valuation at Rs. 1400 Cr. MCX's stake in MCX-SX (including warrants) amounts to Rs. 540 Cr. Within the next 18 months, the shareholding of MCX and FTECH in MCX-SX will have to be reduced to 2.5 % each, as the approval is subject to the condition that the combined voting rights of FTECH and MCX in MCX-SX will not exceed 5 %. Earlier, FTECH held 31 % and MCX held 38 % in MCX-SX. Then, to comply with SEBI guidelines for starting equity trading, they reduced their stake in MCX-SX to 5 % each. This was done through conversion of excess equity stake (beyond 10 %) to warrants. This led to 68.2 % reduction in capital from Rs. 170 Cr to Rs. 54 Cr. The warrants will be sold to banks and financial institutions. The value of MCX's standalone business comes at 20x FY14E, in-line with the average multiple to commodity exchanges in the emerging markets. There are enough reason for MCX to even trade at a premium given the scope to outgrow peer exchanges globally, given that the potential is still untapped in India, its higher growth will be augmented by even better earnings and improvement in return ratios (variable costs largely only in the form of transaction fees paid to parent), and its near-monopolistic market share, to which there is little threat, given MCX’s technology backbone and readiness to latch on to new opportunities and also the policy to maintain 50 % payout ratio is a key valuation positive. The valuation of MCX’s standalone business at 20x FY14E EPS of Rs. 66.5 – Rs. 1,330/sh; the valuation of the stake in MCX-SX (incl. warrants) comes at Rs. 4,500 Cr. Assuming a revenue base of Rs. 130 Cr in FY14, at 11x FY14 Sales, MCX-SX's valuation is Rs. 1400 Cr (much lesser than that implied in the last stake sale). Stake in MCX-SX (including warrants) contributes additional Rs. 110 per share to MCX. It is expected that MCX to have volumes growth of 15 % CAGR over FY12-15 and a PAT CAGR of 13% over this period. Also, the ROE should sustain its level in the high 20's.  In my view MCX could report FY14E EPS of Rs. 66.50/sh and for FY 15E of Rs. 76.50/sh. The stock could be bought for the target price of Rs. 1440 implies 23 % upside in earnings and recommend Accumulate on the stock.

KEY FINANCIALS	FY12	FY13E	FY14E	FY15E
SALES (Rs. Crs)	526.20	517.20	615.20	720.00
NET PROFIT (Rs. Crs)	286.20	282.40	339.40	407.10
EPS (Rs.)	56.10	55.40	66.50	79.80
PE (x)	20.90	21.20	17.60	14.70
P/BV (x)	6.00	5.30	4.60	4.00
EV/EBITDA (x)	14.30	14.70	11.50	9.00
ROE (%)	31.00	26.50	27.80	29.00
ROCE (%)	24.80	25.50	26.90	28.20

I would buy MCX INDIA LTD with a price target of Rs. 1440 for the 6 month target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 1274.00 on your every purchase.

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RETURN ON CAPITAL

HUL : CATCH IT IF YOU CAN !!!

Scrip Code: 500696 / HINDUNILVR

CMP:  Rs. 569.45; Buy at Rs. 565-570 levels.

Target for 6 month - 1 year: Rs. 600.00; STOP LOSS – Rs. 480.00; Market Cap: Rs. 1,23,110.42 Cr; 52 Week High/Low: Rs. 580.45 / Rs. 325.20. 

Total Shares: 216,19,18,098 shares; Promoters: 113,48,49,460 shares – 52.49 %; Total Public holding: 102,70,68,638 shares – 47.48 %; Book Value: Rs. 15.88; Face Value: Rs. 1.00; EPS: Rs. 15.62; Div: 650 %; P/E: 35.85 times; Ind. P/E: 44.19; EV/EBITDA: 39.74 

Total Debt: Rs. ZERO Cr; Enterprise Value: Rs. 1,24,980.48 Cr.

HINDUSTAN UNILEVER LTD: The Company was founded in 1931 and is based in Mumbai, India. The company was formerly known as Hindustan Lever Limited and changed its name to Hindustan Unilever Limited in 2007.  Hindustan Unilever Limited, is a Fast Moving Consumer Goods (FMCG) company – it provides home and personal care products; foods and beverages in India and internationally. The company operates in 7 business segments. The company offers soaps and detergents, including soaps, detergent bars, detergent powders, detergent liquids, and scourers; and personal products - such as oral care, skin care, hair care, deodorant, talcum powder, and color cosmetic products, as well as Ayush services. It also provides beverages - including tea and coffee; foods, such as Atta (flour), salt, and bread; culinary products comprising tomato and fruit based products, and soups; and ice creams, such as ice creams and frozen desserts. In addition, the company offers chemicals, such as glycerin and fine chemicals; agri commodities; and water purifiers, as well as exports marine and leather products. HUL has over 35 brands spanning 20 distinct categories. Its portfolio of brands includes the brand names like - 3 Roses, Annapurna, Brooke Bond, Taaza, Bru, Kissan, Knorr, Kwality Wall’s, Lipton, Modern, Red Label, and Taj Mahal brand names; personal products under the Aviance, Axe, Breeze, Clear, Clinic Plus, Closeup, Dove, Fair & Lovely, Hamam, LEVER Ayush Therapy, Lakme, Lifebuoy, Liril 2000, Lux, Pears, Pepsodent, Pond's, Rexona Soap, Sunsilk, and Vaseline brand names; and home care products under the Active Wheel, Cif, Comfort, Domex, Rin, Sunlight, Surf Excel, and Vim brand names and water purifiers under the brand name Pureit. 

Investment Rationale:

HUL’s management has successfully turned around the business in the past two years through focusing on volume growth, cost rationalisation and faster innovation. From a situation where the company was growing below market average and losing market share in 2009, HUL has consistently delivered near-double-digit volume growth for nine quarters. This has come despite the company raising blended prices by 10 % YoY to pass on raw material cost inflation. HUL’s Management has delivered a strong and sustainable turnaround. HUL’s strong investments in innovation starting from FY10 have imparted volume growth momentum to the business. In a departure from the company’s strategy over the 2000's on rationalising brand portfolio and aligning to the parent’s global objectives, HUL has become more focused on the local market, improved agility (means the capability of rapidly & efficiently adapting to changes) in responding to competition and is churning out a significantly larger number of innovations. Over 60 % of HUL’s large portfolio was touched by innovation in FY12, with a clear focus on premiumisation in established categories and growth in new categories such as deodorants and face washes. HUL’s see a moderate scope for margin expansion as the key raw materials for HUL such as LAB, palm oil and packaging have not seeing an absolute decline in prices besides having seen a moderation in YoY inflation. Given the volume growth momentum, HUL continues to gradually increase prices which should help inch up gross margins in FY13. Also, the strong revenue growth is imparting operating leverage to the business. However, post 1H FY 13, HUL will not have the benefit of a weak base; this could limit margin expansion. In the period of 2000-08, HUL had actually curtailed its portfolio of brands in categories such as soaps, detergents and tea, de-focusing on ‘local brands’ while increasing investments into global brand platforms. However, given the local nature of competition in these three categories, this led to market share losses in many states where HUL de-focussed on regionally strong brands. This is changed now, with management focusing on every part of their portfolio. Thus, local brands such as Sunlight, Hamam, Breeze, Ruby and Lakme have also seen innovation activity in the past two years. In FY12, the company took a strong jump in its rural distribution (which was already the best in the industry) by expanding its coverage by three times. With this, HUL’s total direct retail coverage is over 20 Lakh outlets, compared with 5 -11 lakh outlets of its key competitors. Another positive for HUL is that the high-margin in personal products business has seen very stable growth in the range of 15 %- 20 % over the past nine quarters, driven by strong double-digit volume growth.

Outlook and Valuation:

As an organisation, HUL has become more agile in responding to competitive moves and volatility in input costs, which is needed to remain competitive in the market. HUL’s Soaps & Detergents revenue growth over the past few quarters has been well above the average growth. While drivers like premiumisation should continue to drive a 10 %-15 % sustainable growth in these categories, most of the listed companies are reporting growth well in excess of these levels. One of the reasons is that unbranded products or local brands in these categories are losing share as they become uncompetitive in a high input cost environment. Also, the high cost of capital and the volatility in currency could be impacting small businesses much more than larger companies.

However, the share gain of the branded players should stem at some stage, leading to moderation in revenue growth. Soaps and detergents continue to be an important part of HUL’s profits. For FY12, the segment constituted 47 % of revenue and 36 % of operating profit. Thus, any moderation in growth here could be a key risk for HUL. These categories, being the two largest FMCG categories, are also highly susceptible to down-trading by consumers as they form large parts of the consumer wallet within FMCG. Here is the 13 year short details on HUL's Financial - 

YEAR	EPS (in Rs.)	P/E (X)	BV (in Rs.)	Div/Sh (in Rs.)
1999	4.86	46.29	9.55	2.90
2000	5.95	34.68	11.30	3.50
2001	7.46	29.97	13.82	5.00
2002	8.04	22.60	16.62	5.16
2003	8.05	25.42	09.71	5.50
2004	5.44	26.37	09.50	5.00
2005	6.40	30.82	10.47	5.00
2006	8.41	25.74	12.34	6.00

5 YR	EPS (in Rs.)	P/E (X)	BV (in Rs.)	Div/Sh (in Rs.)
2007	8.73	24.50	06.61	9.00
2008	11.46	20.72	09.45	7.50
2010	10.10	23.63	11.84	6.50
2011	10.58	26.89	12.19	6.50
2012	12.46	32.89	16.25	7.50

HUL has traded at an average one-year forward P/E of 24.3x over the past 10 years, which includes the period of eight years between CY03 and FY11 when the company delivered less than 3 % earnings CAGR, significantly below its listed peers. Even during the peak of the price war with P&G from 2004 to 2006, the stock traded at an average one-year forward P/E of 24.2x. Hence, HUL should trade at a premium to its valuation during these periods given the high visibility of mid-teens earnings CAGR over the next three years. The turnaround affected by management over the past two years was based on investments made in innovation and distribution, which could reap benefits over the next two-three years. Hence, the valuation of HUL comes at 30x one-year forward earnings, which is a 20 % premium to the stock’s 10-year trading average. At the CMP of Rs. 569.45, the stock is trading at 5.62 x FY2012E and 5.22 x FY2013E EV/EBITDA, the stock is trading at a P/E of 37.81 x FY13E and 32.22 x FY14E respectively. Earnings per share (EPS) of company for FY13E and FY14E are seen at Rs. 15.06 and Rs. 17.67 respectively. One can buy HUL with a target price of Rs. 600.00 for a minimum of 6 month to 1 year.

KEY FINANCIALS	FY12	FY13E	FY14E	FY15E
SALES (Rs. Crs)	21,735.60	25,722.81	29,965.11	34,912.91
NET PROFIT (Rs. Crs)	2,691.41	3,255.35	3,820.24	4,517.14
EPS (Rs.)	12.45	15.06	17.67	20.90
PE (x)	41.20	34.10	29.10	24.60
P/BV (x)	31.60	27.10	23.20	19.80
EV/EBITDA (x)	33.20	26.90	22.60	19.00
ROE (%)	87.20	85.50	85.90	86.80
ROCE (%)	87.48	92.91	94.43	95.67

I would buy HINDUSTAN UNILEVER LTD with a price target of Rs. 610 for minimum of 6 months to 1 year. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of  Rs. 480.00 on every purchase as it is the for the 1 year target.

*As the author of this blog I disclose that I do hold HINDUSTAN UNILEVER LTD in my investment portfolio.

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THE BASICS OF CAPITAL BASE : EXPLAINED IN SHORT !!!

Many beginners ask me that what is share capital and how a company is formed, so here is a short explanation to that. Company can have Equity Shares, Preference Shares and or Differential Voting Rights Equity shares as its Share Capital. 

Share Capital denotes to the amount of capital raised by the issue of shares (viz Equity, Preference, DVR or all of them), by a company. It is collected through the issue of shares and remains with the company till its liquidation. Share Capital is owned capital of the company, since it is the money of the shareholders & so these share holders are the owners of the company. The total share capital is divided into small parts & each part is called a 'SHARE'. Share is the smallest part of the total capital of company. 

In India, Share holding of 51% in a company is considered as a controlled holding. Any company willing to go public or willing to have an IPO has to maintain at least 10% of its total issued shares with the general public. Recently SEBI have extended the deadline for all the companies in India to maintain at least 25% of their total issued shares with the general public. So, it means promoters cannot hold more than 75% of the total issued shares in a company. 25% public shareholding is must.

Types of SHARE CAPITAL : 
Authorized Capital - The maximum amount of capital which a company can collect or raise by selling its shares, it is also known as Nominal Capital or Registered Capital. Issued Capital -  Is the part of the Authorized capital which is actually issued to general public. Subscribed Capital - Is the part of the issued capital which is actually subscribed by the general public. Paid Up Capital - Is that part of the called up capital which is actually paid up by the shareholders. Now in general companies are not in practice to have partly paid up or call up money. The Company takes full face value money on the issue. So fully paid up Face value is the Paid Up Capital of the Company.

What is Share Capital Base :
When I form a company, I use my personal wealth as Capital i.e. I invest my own money into the company and into the business activities. In the process of forming & registering a new company under the Companies Act 1966 it needs to be Capitalized whereby I infuse money or assets into the company and get shares of that company in return. e.g. If I infuse Rs. 5000 or assets worth Rs. 5000 to form a company , I will be getting Shares worth Rs. 5000 of that newly formed company & so I become the promoter of the company. Capitalization is the process in which owners have to come with number of shares and its face value.

Here in India, per share value used is Rs. 10 , Rs. 5, Rs. 2, Re. 1 as its face value  which is then multiplied by number of shares issued or divided by total invested money. Let’s take some example – In my company I invest Rs. 5,000 - Thus the capitalization of my company is as follows –

1. Authorized capital is Rs. 5,000 i.e. 500 Shares x Rs. 10/share.
2. Paid up Equity Capital is Rs. 5,000, thus Rs. 5,000 becomes the total capital base of my company at the time of registration or inception.

There can also be second scenario where, I can have my capital base of Rs. 6,000…but I paid only Rs. 5,000. Therefore –

1. Authorized capital will be Rs. 6,000 i.e. 600 shares x Rs. 10 each.
2. Issued, Subscribed & Paid up Equity share capital is Rs. 5,000 i.e. issued capital is only of Rs. 5,000 & Issued equity shares is only 500 shares.

This is also the VALUE of business because it is still not generating any profits or it is still not established etc. I will use the second scenario for the further discussion which is in usual practice. To increase the value of my company, I work hard and increase the value of my company by branding, marketing, market positioning, revenue, profits, future potential, and market share. I keep all the profits as I am the only share holder having all the company's paid up equity capital and so my business has high net-worth. The total earnings of my company are divided by 500 shares. So the company’s Earnings Per Share (EPS) is based on 500 shares that are issued to me.

Remember, according to my authorized capital, I still have 100 shares of Rs. 10 face value more remaining to be issued. They are not yet issued or not been paid up & hence authorized capital is not considered while calculating EPS - its just taken as a note.

Going forward, at some point in the future, I feel that I am in need of more money or capital for the expansion or I want to grow my business – I have 2 ways – either I can go to banks or  go to other sources of finance or I forgo a little bit of my equity holdings.

If I go to banks which are loans/debts taken from banks – then I have to pay Interest which under all circumstances I have to pay. And, If I issue shares i.e. I forgo a little bit of my equity holding then in this case I don’t have to pay interest to them (my new shareholders) nor its compulsory to declare dividends, but I have to share my profits, losses and even bankruptcy with my new shareholders.

            So I decide to go for raising capital by diluting the equity i.e. I am taking additional partners by issuing them new shares. These partners can be Private Equity players, financial institutions or any public investor (if it is opened to common public which is called IPO) which will be my new shareholders. During this course of time, the value of my business has raised much more than Rs. 6,000 as it is now an established business making lots of good profit and with lots of potential & whoever wishes to become partner or stakeholder will be getting partial ownership of the well established profitable business with minimum risk and so I will be demanding Premium on the face value of Rs. 10 from my new shareholders, this premium will be as per the present value of the business.

How to determine Present Value – 

For example – Consider that the present value of the business comes to Rs. 1,20,000. With this increased value of the business, the market value per share will be Rs. 200/share. (Rs. 1,20,000/600 shares). I decide to issue 50 share from remaining 100 shares to go public. I use public offering (IPO) & price my share at Rs. 200/sh. I raise Rs. 10,000 (50 x Rs. 200). Now, the capital structure is as under –

1. Authorised capital is still Rs. 6,000 (600 sh of Rs.10 each).
2. Issued, Subscribed & Paid up Equity is Rs. 5500 (original 500 sh & additional 50 share).
3. Share premium Account will now come to existence with Rs. 9500 (Rs. 10,000 – 50 x 10)  

Share premium is considered as part of total shareholders’ equity. Additional money beyond face value is called Share Premium. Total Shareholder's Equity is also known as Net-worth or Stockholders Equity or Shareholders Fund or Share Capital.

            A company can also issue Preference shares or DVR share along with Equity shares. Many beginners presume that Equity base is the IPO price x IPO shares, but the fact is that in IPO the owner is only opening partial ownership to raise additional capital for growing business. At this point the total earnings of the company is divided by 550 shares. Because now a total of 550 shares have been issued & issued subscribe & paid up equity has increased to 550 shares. Even though the mass public has only 50 shares, it is not the only shares in company, IPO shares are add on to existing 500 shares. 

Company issues lavish Bonuses of Shares before IPO -
If one reads the Draft Red Herring Prospectus of any IPO one will notice that before the IPO the promoters or pre IPO shareholders are given lavish bonuses of shares reducing the net worth of company and increasing the issued, subscribed & paid up capital base of the company. I have seen some issues whereby the promoters are given bonus in the ratio of 100 shares for every 1 share held before the IPO this makes the promoter's acquisition price of equity share less than its Face value, in some cases it goes into paise. This is because before IPO, the value of shares are much higher due to the past profits are accumulated as "Reserves" in the balance sheet. And to draw back my capital I issue fresh new shares as bonus thus reducing my reserve to that extend and hence increasing the share base reducing its value. You can see many big investors exit wholly or partially in the IPO as they already have taken back their invested money in the form of Bonus shares, So one should also consider this while investing in the IPO's.