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.

READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE

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.    

EROS INTERNATIONAL MEDIA: Shaping the future of Indian Entertainment !!!

Scrip Code: 533261 / EROSMEDIA

CMP:  Rs. 162.55; Buy at current levels.

Medium to Long term Target – Rs. 180; STOP LOSS – Rs. 149.55; Market Cap: Rs. 1,491.84 Cr; 52 Week High/Low: Rs. 276.95 / Rs. 153.00

Total Shares: 9,17,77,720 shares; Promoters : 7,14,07,000 shares –77.80 %; Total Public holding : 2,03,70,720 shares – 22.20 %; Book Value: Rs. 72.99; Face Value: Rs. 10.00; EPS: Rs. 13.74; Div: NIL % ; P/E: 11.91 times; Ind P/E: 29.33; EV/EBITDA: 8.76.

Total Debt: Rs. 354.20 Cr; Enterprise Value: Rs. 1,846.04 Cr.

EROS INTERNATIONAL MEDIA: EROS INTERNATIONAL MEDIA was incorporated as in 1977 and is based in Mumbai, India. It is subsidiary of EROS WORLDWIDE FZ LLC. Eros International Media Limited operates in the media and entertainment sector in India and internationally. It engages in sourcing content through acquisition, co-production, or production; the theatrical distribution network operation; licensing films for cable, satellite, and terrestrial television; and the distribution of Tamil film content in Western Europe through its own television station. The company also distributes content through physical formats, such as DVD, VCD, and Blu-rays, as well as the digital mediums comprising VOD, DTH, Internet, mobile, and in-flight entertainment; and involved in music publishing and distribution activities. In addition, it provides production planning and visual effects services for films; engages in the acquisition, production, and distribution of Tamil films worldwide; and involved in cable or DTH licensing, as well as trading and exporting international film rights. The company owns approximately 1,100 films comprising Hindi, Tamil, and other regional languages & has aggregated rights to over 1,900 films plus additional 700 films for which the company holds digital rights only. In the year 2006, Eros International Plc, the holding company of the Eros Group, became the first Indian company to list on the Alternative Investment Market (AIM) of the London Stock Exchange. It distributes content through retail outlets and it’s Website under the Eros and Ayngaran labels. EROSMEDIA can be compared with PVR Ltd, Prime Focus ltd, Tips Industries Ltd.

Investment Rationale:

Eros International Media Ltd is a leading global company in the Indian filmed entertainment industry that acquires co-produces and distributes Indian language films in multiple formats.The Company has strong distribution capabilities which enable them to target a majority of the 1.2 billion people in India, primary market for Hindi language films. The company has distribution offices in Mumbai, Delhi, Punjab, Mysore and Chennai. The group has a distribution network that spans over 50 countries, with offices in India, UK, USA, Dubai, Australia, Fiji, Isle of Man and Singapore. The company also holds license of airborne rights to certain airlines for in-flight movie viewing. 

Eros International Media Ltd has announced the launch of its online music channel Eros Now Music on YouTube. Eros has leveraged its wide reach and the subscriber base of its YouTube presence to launch a new channel Eros Now Music for established and emerging artists. Eros Now Music will feature established as well as emerging talent including Shaan, DJ Sheizwood, UK based pop artist Kimeli, Shweta Yogendra, Farhan Saeed, Gajendra, Simmy and Tippy, Rahul / Shah Rule among others. The content on the newly launched channel will include music videos and special behind the scenes footage. Eros International collaborates with Anurag Kashyap Films Pvt Ltd & Sikhya Entertainment to present Peddlers in the International Critics' Week, Cannes 2012. EIML has been honored with a Certificate of Excellence at the recently held Annual Inc. India Awards. EIML released 23 films during Q1FY13 in different languages; 5 Hindi, 18 Tamil & other regional language films. EIML recently signed a licensing agreement with colors’ Viacom18 Media Pvt. Ltd. EIML has been honored with a Certificate of Excellence at the recently held Annual Inc. India Awards. Eros International Media Ltd has released 23 films during Q1FY13 in different languages (19 films in Q1 FY12); 5 Hindi, 18 Tamil & other regional language films. The company has written a story of growth and positive start for Q2 FY13 with the successful release of “Cocktail” in July 2012, which has done a net box office collection of Rs. 100 crore worldwide. Eros International announces satellite television licensing deal with COLORS' Viacom18 Eros International Media Ltd has signed a licensing agreement with COLORS’ Viacom18 Media Pvt. Ltd for new and forthcoming releases and library films to be shown exclusively on Viacom18's COLORS channel in India.

Outlook and Valuation:

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. There is increased penetration in Indian markets, which is expected to even intensify further, owing to a revolution brought in by digital technology. Wireless broadband, growing internet usage, cable digitisation and higher DTH adoption would further drive Indian M&E industry. The report also noted that smart phones, tablets, gaming devices have laid the foundation of a new wave in the industry. The company reported net profit of Rs. 31.41 Cr as against Rs. 21.66 Cr in the last quarter, the revenue last quarter was Rs. 2,570.30 Cr, the company posted an tremendous growth of 44.44 % in EPS which stood at Rs. 3.42/sh in the last quarter. At the current market price of Rs. 162.55, the stock P/E ratio is at 8.37 x FY13E and 7.16 x FY14E respectively. Earning per share (EPS) of the company for the earnings for FY13E and FY14E is seen at Rs. 19.40 and Rs. 22.69 respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 25 % and 21 % over 2011 to 2014E respectively. On the basis of EV/EBITDA, the stock trades at 5.33 x for FY13E and 4.57 x for FY14E. Price to Book Value of the stock is expected to be at 1.52 x and 1.26 x respectively for FY13E and FY14E. It is expected that the company's surplus scenario is likely to continue for the next three years, will keep its growth story in the coming quarters also. One can ‘BUY’ in this particular scrip with a target price of Rs. 180.00 for Medium to Long term investment. 

KEY FINANCIALS	FY11	FY12	FY13E	FY14E
SALES (Rs. Crs)	706.97	943.88	1,170.41	1,388.69
NET PROFIT (Rs. Crs)	117.23	147.84	178.04	208.25
EPS (Rs.)	12.82	16.12	19.40	22.69
PE (x)	13.05	10.38	8.62	7.37
P/BV (x)	2.29	1.84	1.52	1.26
EV/EBITDA (x)	9.26	6.62	5.49	4.71
ROE (%)	17.67	17.87	17.73	17.19
ROCE (%)	19.47	18.70	19.47	19.58

I would buy EROS INTERNATIONAL MEDIA LTD with a price target of Rs. 180 for the medium to long term 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. 149.55 on your every purchase.

READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE