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Thursday, November 09, 2006

Sharekhan Investor's Eye dated November 09, 2006


Hindustan Lever
Cluster: Apple Green
Recommendation: Buy
Price target: Rs280
Current market price: Rs250

Price hike to ease margin pressure
There has been a buzz in the last few days that Hindustan Lever Ltd (HLL) has increased prices in the soap and laundry categories and in some skin and oral care products. The company is believed to have taken price hikes in Lux, Breeze, Hamam, Lifebuoy, Rexona and Dove brands of soaps; Wheel and Surf brands of laundry; and a few stock keeping units (SKUs) of Fair & Lovely, Lakme and Pepsodent. The average price hike is believed to be between 5-8%.

International Combustion (India)
Cluster: Cannonball
Recommendation: Buy
Price target: Rs519
Current market price: Rs335

Robust performance

Result highlights

  • The revenues of International Combustion India Ltd (ICIL) grew by 28.0% year on year (yoy) to Rs20.3 crore in Q2FY2007, in line with our estimates. The growth was strong due to the good performance of the gearbox & geared motor drive system division (GMGBD).
  • The revenues of the GMGBD grew by 43.1% yoy to Rs5.5 crore, ahead of our estimates. The revenues of the heavy engineering division (HED) grew by 24.1% yoy to Rs15.0 crore, in line with our estimates.
  • The operating profit margin (OPM) of the company improved by 460 basis points yoy to 21.1% in Q2FY2007. The margin expansion was driven largely by the leverage effect that came into play with lower employee cost and other expenses. Consequently, the operating profit grew by 64% to Rs4.3 crore.
  • The OPM of the HED grew by 460 basis points yoy to 30.6%. The GMGBD had reported negative margins in the first quarter and in this quarter its margins bounced back to 23.4% on the back of healthy revenues. Though on a year-on-year (y-o-y) basis the same were down 240 basis points.
  • The other income grew to Rs0.3 crore from Rs0.1 crore in Q2FY2006 and the interest cost declined by 63.2% yoy to Rs0.1 crore. The net profit grew by 64.4% yoy to Rs2.2 crore, in line with our estimates.
  • The outstanding order book stands at Rs51 crore after a growth of 59% yoy. The current order backlog stands at 0.8x its FY2006 revenues, imparting a strong visibility to the earnings.
  • ICIL is currently trading at a price/earnings ratio (PER) of 7.1x its FY2008E earnings  and 4.4x its FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain a Buy recommendation on the stock with a price target of Rs519.
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