india morning bell - rathionline.com · in fy16, and recovery in the cv cycle. sensex: 25516 nifty:...

Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities

India I Equities Country

Daily

2 July 2014

India Morning Bell

All the latest research and data

India Banks – Services, farm and retail loans drive credit growth in May’14. In May’14, non-food bank-credit growth came at 13% yoy, lower than the 15.3% of May’13, and slower than that in Apr’14 (14.2%). Key segments driving bank-credit growth were services (23.6% of bank credit, 14% yoy), retail (18.8% of bank credit, 13.5% yoy) and farm (12.6% of bank credit, 16.8% yoy). The industry segment saw slower yoy growth.

Hindustan Unilever – Despite the slowdown, continuing investments; Sell. We value the stock at a target price of `510, at a target PE of 27x FY16e earnings. As Hindustan Lever continues to reel from the heat of keener competition in segments such as laundry, skin care and oral care, we expect it to continue investing in these categories. We expect it to report revenue and earnings CAGRs of just 10% and 5%, respectively. Hence, we believe that, at current levels, any stock-price upside has already been capped.

Mahindra & Mahindra – Decent drive; Hold. While the UV portfolio comes off a lower base here on, short-term UV demand recovery in M&M’s key segments is likely to be restricted. Tractors will now be faced with a higher base and the possibility of a lower crop output due to adverse weather conditions. Thus, the short term appears to have very few upsides for the company. The long-term outlook, however, remains good with likelihood of agri-mechanisation, launches in the UV1 segment in FY16, and recovery in the CV cycle.

Sensex: 25516

Nifty: 7635

India: Non-food credit-growth progress modest, albeit improving

36,000

40,000

44,000

48,000

52,000

56,000

May

-11

Aug-

11

Nov

-11

Feb-

12

May

-12

Aug-

12

Nov-

12

Feb-

13

May

-13

Aug-

13

Nov-

13

Feb-

14

May

-14

(`bn)

Source: The RBI, Anand Rathi Research

Ch

art

of

the

da

y

Markets 1 Jul ’14 1 Day YTD Sensex 25516 0.4% 20.5%Nifty 7635 0.3% 21.1%Dow Jones 16956 0.8% 2.3%S & P 500 1973 0.7% 6.8%FTSE 6803 0.9% 0.8%Nikkei* 15420 0.6% -5.3%Hang Seng* 23314 0.5% 0.0%

Volumes (US$m) 1 Jul ’14 1 Day Avg '14Cash BSE 624 5.7% 506Cash NSE 2,763 -4.1% 2,496Derivatives (NSE) 15,895 -12.7% 27,730

Flows (US$m) 1 Jul ’14* MTD YTD FII – Cash Buy 631 14,612 72,950Sell 488 12,752 63,621Net 143 1,840 9,917FII - Derivatives Buy 1,708 104,413 435,125Sell 1,542 103,694 433,398Net 166 719 1,034DII – Cash Buy 207 3,132 12,729Sell 336 2,743 14,168Net -129 389 -1,310

Others 1 Jul ’14 1 Day YTD Oil Brent (US$/bbl)* 112.2 -0.1% 3.4%Gold (US$/oz)* 1,325.3 -0.1% 9.9%Steel (US$/MT) 590.0 0.0% 0.9%`/US$ 60.08 0.0% 2.9%US$/Euro* 1.37 0.0% 0.5%Yen/US$* 101.62 -0.1% 3.6%Call Rate 8.00% -60.bps -75.bps10-year G-Secs 8.74% 0.0bps -8.8bpsEMBI spreads 278.55 -4.3bps -55.7bps@7:30am *Provisional Source: BSE, Bloomberg

2 July 2014 India Morning Bell

Anand Rathi Research India Equities

Market Data

Price Performance Price Performance Price Performance Top-5 gainers Top-5 gainers Top-5 gainersCompany CMP (INR) 1 wk (%) 1 Mth (%) Company CMP (INR) 1 wk (%) 1 Mth (%) Company CMP (INR) 1 wk (%) 1 Mth (%)

PAGE INDUSTRIES 6874 14.8 18.9 CEAT LTD 705 38.4 61.7 MAHINDRA UGINE 428 48.7 57.9

PETRONET LNG LTD 187 12.1 17.0 RAJESH EXPORTS 191 29.2 36.6 PRIME FOCUS LTD 48 22.9 39.4

BHARAT ELECTRON 2008 10.4 23.2 NATCO PHARMA LTD 1114 17.4 45.8 KESORAM INDS LTD 114 20.6 46.3

MINDTREE LTD 899 10.2 28.6 MAHANAGAR TELE 37 17.1 17.1 GRANULES INDIA 485 15.4 33.9

ASHOK LEYLAND 36 8.4 9.4 KAVERI SEED 724 14.8 12.3 NAVIN FLUORINE I 633 14.7 48.7

Top-5 losers Top-5 losers Top-5 losersCompany CMP (INR) 1 wk (%) 1 Mth (%) Company CMP (INR) 1 wk (%) 1 Mth (%) Company CMP (INR) 1 wk (%) 1 Mth (%)

JAIPRAKASH ASSOC 73 (7.2) (6.7) AMTEK INDIA LTD 101 (21.2) 32.3 S MOBILITY LTD 32 (18.6) 2.1

SHRIRAM TRANSPRT 850 (6.9) (7.2) JK LAKSHMI CEMEN 210 (13.9) 18.0 MATRA KAUSHAL EN 49 (16.4) (6.6)

MPHASIS LTD 420 (6.8) 4.9 SIFY TECHNOL-ADR 129 (10.6) 3.2 ROLLATAINERS LTD 331 (14.9) 120.5

KOTAK MAHINDRA 879 (6.2) 0.1 WELSPUN CORP LTD 87 (8.2) (2.9) IL & FS INVESTME 23 (10.9) 13.9

UNITED SPIRITS 2608 (5.1) (6.6) VA TECH WABAG LT 1220 (7.9) 25.1 PEARL AGRICULTUR 384 (10.7) (5.3)

Volume Volume VolumeVolume spurts Volume spurts Volume spurtsCompany CMP (INR) 1 wk avg 1/4 wk (%) Company CMP (INR) 1 wk avg 1/4 wk (%) Company CMP (INR) 1 wk avg 1/4 wk (%)

MINDTREE LTD 899 626,829 97.9 DB CORP LTD 310 811,828 197.3 CAPRI GLOBAL CAP 172 322,970 263.3

ZEE ENTERTAINMEN 284 7,203,465 92.9 RAJESH EXPORTS 191 1,384,591 189.7 NEWTIME INFRASTR 48 1,990 218.1

GILLETTE INDIA 2,123 35,098 70.1 CEAT LTD 705 2,971,527 187.3 APL APOLLO TUBES 283 315,517 176.4

CRISIL LTD 1,775 43,807 63.8 ABBOTT INDIA LTD 2,041 26,084 172.2 HUBTOWN LTD 165 221,318 164.0

UNITED BREWERIES 696 439,576 61.3 NATCO PHARMA LTD 1,114 553,078 154.1 MAHINDRA UGINE 428 376,060 161.0

Technicals Technicals Technicals Above 200 DMA Above 200 DMA Above 200 DMACompany CMP (INR) 200D Avg (%) Company CMP (INR) 200D Avg (%) Company CMP (INR) 200D Avg (%)

SUZLON ENERGY 31 13 140.4 BEML LTD 850 302 182.4 GREENCREST FINAN 33 10 214.4

IRB INFRASTRUCTU 217 108 102.0 # STERLITE TECH LT 70 27 159.8 ECO FRIENDLY FOO 422 162 161.3 UNITECH LTD 35 17 100.1 # HINDUSTAN CONST 42 18 137.0 AHLUWALIA CONTRA 105 41 156.3

ESSAR OIL LTD 112 61 85.7 # CCL INTERNATIONA 360 158 129.9 JMT AUTO LTD 455 184 153.8

BALKRISHNA INDS 730 399 83.1 SINTEX INDUS LTD 97.4 43.5 125.9 MAHINDRA UGINE 428 170 150.3

Below 200 DMA Below 200 DMA Below 200 DMACompany CMP (INR) 200D Avg (%) Company CMP (INR) 200D Avg (%) Company CMP (INR) 200D Avg (%)

BHUSHAN STEEL 397 462 (14.0) BOMBAY RAYON FAS 167 190 (12.3) KAPPAC PHARMA 373 562 (33.5)

UNITED BREWERIES 696 799 (12.9) WNS HOLDINGS-ADR 1,132 1,224 (7.6) SKIL INFRASTRUCT 52 76 (31.8)

IDEA CELLULAR 137 153 (10.3) JET AIRWAYS IND 261 279 (6.6) LUMINAIRE TECH 26 37 (29.3)

GLAXOSMITHKLINE 2,487 2,630 (5.3) JYOTHY LABORATOR 179 191 (6.2) JAYBHARAT TEXTIL 22 30 (25.6)

INFOSYS LTD 3,204 3,355 (4.4) R*SHARES GOLD 2,544 2,687 (5.4) CLARIS LIFESC 146 173 (15.3)

Small Caps(US$100m-250m)

Large Caps(>US$1bn)

Mid Caps(US$250m-1bn)

Source: Bloomberg


Banks

UpdateIndia I Equities

2 July 2014

India Banks Services, farm and retail loans drive credit growth in May’14

Key takeaways

Non-food credit grew 13% yoy. In May’14, non-food bank-credit growth came at 13% yoy, lower than the 15.3% of May’13, and slower than that in Apr’14 (14.2%). Key segments driving bank-credit growth were services (23.6% of bank credit, 14% yoy), retail (18.8% of bank credit, 13.5% yoy) and farm (12.6% of bank credit, 16.8% yoy). The industry segment (45% of bank credit, 11.4% yoy) saw slower yoy growth.

Bank credit to industry fell sharply, led chiefly by infra. Yoy growth in bank credit to industry has slowed down starkly, from 15.9% in May’13 to 11.4% in May’14, possibly due to the sluggish macro-economic environment. Over the same period its share in incremental non-food credit slid from 47.4% to 39.8%. Yoy growth in bank credit to infrastructure also slowed down, from 21.4% in May’13 to 11% a year later. In that period the share of infrastructure in incremental non-food credit slipped from 20.8% to 13.2%.

Bank credit to retail robust, yet growth in housing loans subsides. Yoy growth in bank credit to retail has fallen, from 17.6% in Apr’13 to 13.5% a year later, yet is strong. In that period its share in incremental non-food credit has fallen from 21.2% to 19.4%. Yoy growth in bank credit to housing has also fallen considerably, from 19.4% a year ago to 15.8% in May’14. In that period, housing’s share in incremental non-food credit has fallen slightly, from 11.9% to 11.8%. Yet, housing continued to comprise a high 60.5% of incremental retail loans in May’14.

Bank credit to services improves. Yoy growth in bank credit to services has been above overall credit growth, and has fallen a mite, from 14.1% in May’13 to 14% a year later. In that period its share in incremental non-food credit has risen from 21.8% to 25.1%. While yoy growth in bank credit to NBFCs has shot up from 0.3% in May’13 to 21.7% in May’14, over the same period bank credit to transport operators has also risen sharply, from 4.8% to 10.3%.

Neutral Sensex: 25516

Nifty: 7635

Bankex vs. Sensex

Bankex

Sensex

708090

100110120130140

Jul/1

3

Aug/

13

Sep/

13O

ct/1

3

Nov

/13

Dec

/13

Jan/

14

Feb/

14M

ar/1

4

Apr/1

4M

ay/1

4

Jun/

14

Source: Bloomberg

Fig 1 - India banks’ credit deployment: May’14 ` bn 31-May-13 18-Apr-14 30-May-14 YoY % MoM % Incr. YoYNon-food credit 49,447 55,837 55,895 13.0 0.1 6,448 1. Farm 6,034 6,901 7,045 16.8 2.1 1,012 2. Industry 22,593 25,140 25,159 11.4 0.1 2,566 3. Services 11,547 13,348 13,164 14.0 (1.4) 1,617 4. Retail 9,273 10,394 10,527 13.5 1.3 1,254 Priority 16,166 18,611 18,644 15.3 0.2 2,478 % of Non-food credit 1. Farm 12.2 12.4 12.6 40 bps 25 bps 2. Industry 45.7 45.0 45.0 (68) bps (1) bp 3. Services 23.4 23.9 23.6 20 bps (35) bps 4. Retail 18.8 18.6 18.8 8 bps 22 bps Priority 32.7 33.3 33.4 66 bps 2 bps Source: Anand Rathi Research

2 July 2014 India Banks – Services, farm and retail loans drive credit growth in May’14

Anand Rathi Research 2

Fig 2 – Bank credit to Industries (` bn) 23-Aug-13 20-Sep-13 18-Oct-13 29-Nov-13 27-Dec-13 24-Jan-14 21-Feb-14 21-Mar-14 18-Apr-14 30-May-14

Mining & Quarrying (incl. coal) 323 324 333 336 354 359 357 353 359 372

Food Processing 1,214 1,214 1,221 1,292 1,370 1,398 1,454 1,480 1,509 1,515

Beverage & Tobacco 161 163 163 162 168 168 173 186 184 184

Textiles 1,849 1,870 1,869 1,893 1,946 1,964 2,000 2,040 2,024 2,009

Leather & Leather Products 90 93 95 96 100 99 100 103 101 98

Wood & Wood Products 82 84 86 89 90 92 92 94 92 94

Paper & Paper Products 307 309 313 319 320 326 329 331 332 330

Petroleum, Coal & Nuclear Fuels 568 592 602 556 575 580 571 635 584 569

Chemicals & Chemical Products 1,581 1,715 1,607 1,571 1,656 1,542 1,571 1,677 1,632 1,540

Rubber, Plastic & their Products 321 333 342 349 354 364 364 368 364 356

Glass & Glassware 72 72 80 84 86 87 87 87 93 89

Cement & Cement Products 494 498 495 511 527 522 529 541 550 557

Basic Metal & Metal Product 3,292 3,368 3,377 3,381 3,449 3,479 3,532 3,620 3,571 3,555

All Engineering 1,362 1,382 1,373 1,381 1,388 1,397 1,418 1,456 1,443 1,460

Vehicles & Transport Equipment 637 656 644 650 659 667 673 677 672 663

Gems & Jewellery 700 703 696 680 637 693 697 720 700 685

Construction 538 547 569 588 588 611 608 614 679 682

Infrastructure 7,847 7,943 7,887 7,946 8,047 8,162 8,286 8,398 8,442 8,573

Other Industries 1,860 1,850 1,812 1,841 1,803 1,777 1,807 1,850 1,812 1,831

Total Industries 23,301 23,715 23,565 23,723 24,117 24,285 24,648 25,229 25,140 25,159

Source: RBI

Fig 3 – Bank credit to Services (` bn) 23-Aug-13 20-Sep-13 18-Oct-13 29-Nov-13 27-Dec-13 24-Jan-14 21-Feb-14 21-Mar-14 18-Apr-14 30-May-14

Transport Operators 823 830 848 840 860 875 885 895 918 900

Computer Software 177 173 178 179 177 177 175 176 169 169

Tourism, Hotels & Restaurants 374 384 384 386 387 391 392 392 391 389

Shipping 90 93 93 93 91 91 94 99 95 95

Professional Services 633 637 671 662 681 689 693 707 721 708

Trade 2,846 2,945 2,978 3,005 3,042 3,049 3,151 3,228 3,260 3,216

Commercial Real Estate 1,360 1,358 1,437 1,431 1,428 1,466 1,470 1,544 1,526 1,538

NBFCs 2,834 3,070 2,909 2,869 2,904 2,812 2,819 2,946 3,119 3,037

Other Services 2,912 3,062 2,975 2,989 3,060 3,038 3,205 3,375 3,149 3,111

Total Services 12,050 12,553 12,472 12,456 12,628 12,589 12,884 13,370 13,348 13,164

Source: RBI

Fig 4 – Bank credit to Retail (` bn) 23-Aug-13 20-Sep-13 18-Oct-13 29-Nov-13 27-Dec-13 24-Jan-14 21-Feb-14 21-Mar-14 18-Apr-14 30-May-14

Consumer Durables 94 96 95 100 103 110 124 128 137 139

Housing 4,979 5,056 5,108 5,121 5,185 5,243 5,291 5,408 5,451 5,558

Loans against FDs 600 590 566 565 586 587 569 641 593 550

Advances against shares, bonds, etc. 29 31 32 33 34 35 36 38 34 33

Credit Cards 236 235 234 241 244 253 254 249 254 263

Education 573 582 585 589 592 599 602 600 601 601

Vehicle Loans 1,174 1,186 1,202 1,240 1,261 1,274 1,285 1,304 1,340 1,363

Other Personal Loans 1,879 1,876 1,880 1,955 1,985 1,990 1,999 1,998 1,984 2,020

Total Retail 9,564 9,653 9,702 9,844 9,990 10,091 10,159 10,367 10,394 10,527

Source: RBI



Fig 5 – Non-food credit-growth progress modest, albeit improving

36,000

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(`bn)

Source: RBI, Anand Rathi Research

Fig 6 – While non-food credit growth (yoy) was modest, incremental non-food credit was lower yoy

5,250

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Non-food credit (incr.) Non-food credit YoY (RHS)


Fig 9 – Loans to industries since Jan’12 have been on a continual downtrend

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Fig 10 – Large industries held the lion’s share of loans to industry

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Fig 7 – Non-food credit composition unchanged in May’14

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Fig 8 – The proportions of retail and industry loans in incremental non-food credit have risen qoq

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Farm Industry Services Retail




Fig 11 – Infrastructure’s share in bank credit has been steadily declining since Jul’13

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Fig 12 – Power dominates infra loans; share of telecoms loans has declined yoy

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Fig 13 – Growth in bank credit to construction has accelerated since Aug’13. . .

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Fig 14 – . . .but comprises a very small share of incremental non-food credit

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Fig 15 – Yoy growth in bank credit to the services sector is strong

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Fig 16 – Services sector: Yoy growth in bank credit to commercial real estate is robust

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Fig 17 – Services sector: Yoy growth in bank credit to NBFCs on an uptrend since Mar’14

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Fig 18 – Services sector: Yoy growth in bank credit to transport operators has accelerated since Jul’13

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Fig 19 – Services sector: Yoy growth in bank credit to trade is modest

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Fig 20 – Services sector: Almost equal share of wholesale and retail in bank credit to the trade segment

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Fig 21 – Bank credit to retail is robust; its share in incremental credit has steadily risen since Jan’12

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Fig 22 – Retail loans have primarily been driven by housing loans

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Fig 23 – Credit cards and education loans comprise a small (<1%) share of incremental non-food credit

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Fig 24 – While retail auto-loan growth has fallen, loans to vehicles & transport equipment have risen since Jul’13

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Vehicles & transport equiment YoY Retail auto loans YoY (RHS)


Fig 25 – Yoy growth in bank credit to the farm sector has improved, its share in incremental credit has steadily risen

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Fig 26 – Share of the farm sector in further priority-sector credit has risen over the past year (May’13– May’14)

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Fig 27 – Strong yoy growth in bank credit to the priority sector, but lower qoq

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Fig 28 – Priority sector housing share in incremental non-food credit is now below 5%

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Appendix Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.

Anand Rathi Ratings Definitions

Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below:

Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5% Anand Rathi Research Ratings Distribution (as of 1 July 2014) Buy Hold Sell Anand Rathi Research stock coverage (196) 60% 27% 13% % who are investment banking clients 4% 0% 0%

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Key financials (YE Mar) FY12 FY13 FY14 FY15e FY16e

Sales (`m) 234,363 270,040 285,390 313,384 344,631

Net profit (`m) 26,770 32,233 37,068 38,067 40,488

EPS (`) 12.4 14.9 17.1 17.6 18.7

Growth (%) 25.3 20.4 15.0 2.7 6.4

PE (x) 50.7 42.1 36.6 35.7 33.5

PBV (x) 39.1 51.1 40.4 37.5 35.0

RoE (%) 89.6 105.2 123.3 109.1 108.0

RoCE (%) 92.7 94.3 88.8 88.8 92.8

Dividend yield (%) 1.2 2.9 2.1 2.2 2.4

Net gearing (%) (92.9) (94.9) (112.4) (115.0) (119.4)

Source: Company, Anand Rathi Research

Consumer

UpdateIndia I Equities

2 July 2014

Hindustan Unilever

Despite the slowdown, continuing investments; Sell

Key takeaways from analyst meet

Product launches in line with parent’s strategy. Compared to the earlier strategy of launching products such as Wheel, Close Up, Fair & Lovely which are suitable to Indian consumers, HUL now seems focused on introducing global products in India. Dove Skin Care range, Axe Deodorants, variants of Lipton tea, Tressemme and Tony & Guy shampoos are have been rolled out simultaneously in most countries where Unilever operates. We believe this would help due to economies of scale and reduce R&D costs. Aggressive focus on male grooming. On the success of Fair & Lovely men’s cream, HUL has introduced Vaseline men’s cream and has recently rolled out Ponds men’s fairness range. It plans to aggressively launch variants under the Axe brand. It expects that male grooming is extremely under-penetrated in India and has healthy growth potential in the coming decade. Increase in advertisements in non-TV media. HUL is seeking various ways to utilise the non-TV media as consumers are paying more attention to other means such as mobile phones and the internet. It has started a unique entertainment system, ‘Kankhajoora tesan’, on mobile phones and begun showcasing its brands as an integral part of movies (Sunsilk in the movie 2 States). It has also increased promotion of Lifebuoy via stamps on rotis. Initiatives in trade to drive growth. In FY14 HUL aggressively rolled out its ‘perfect stores’ strategy, helping increase throughput per store and increase in-shop promotions. It also resorted to glow signs instead of paper tapes to promote premium product launches. Our take. We value the stock at a target price of `510, at a target PE of 27x FY16e earnings. As Hindustan Lever continues to reel from the heat of keener competition in segments such as laundry, skin care and oral care, we expect it to continue investing in these categories. We expect it to report revenue and earnings CAGRs of just 10% and 5%, respectively. Hence, we believe that, at current levels, any stock-price upside has already been capped. Risks. Lower raw material prices & lower than expected competitive pressure

Rating: Sell Target Price: `510 Share Price: `628

Key data HUVR IN / HLL.BO

52-week high / low `725 / `537

Sensex / Nifty 25516/7635

3-m average volume US$4.4m

Market cap `1,347bn / US$22bn

Shares outstanding 2,163m

Relative price performance

HUVR

Sensex

500

550

600

650

700

750

800

Jul-1

3

Sep-

13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Source: Bloomberg

Shareholding pattern (%) Mar ’14 Dec ’13 Sep ’13

Promoters 67.3 67.3 67.3 - of which, Pledged - - -Free Float 32.7 32.7 32.7 - Foreign Institutions 14.1 14.8 15.3 - Domestic Institutions 4.1 3.4 3.0 - Public 14.5 14.5 14.4

2 July 2014 Hindustan Unilever – Despite the slowdown, continuing investments; Sell


Quick Glance – Financials and ValuationsFig 1 – Income statement (` m) Year-end: Mar FY12 FY13 FY14 FY15e FY16e

Net revenues 234,363 270,040 285,390 313,384 344,631 Revenue growth (%) 18.9 15.2 5.7 9.8 10.0 - Oper. expenses 199,528 227,987 244,916 268,272 294,727 EBIDTA 34,836 42,053 40,474 45,111 49,905 EBITDA margin (%) 14.9 15.6 14.2 14.4 14.5 - Interest expenses 17 257 407 353 353 - Depreciation 2,335 2,513 2,955 3,402 3,822 + Other income 2,596 5,320 12,653 10,235 9,140 - Tax 8,215 12,267 12,594 13,414 14,266 Effective tax rate (%) 23.4 27.5 25.3 26.0 26.0 Reported PAT 26,865 32,337 37,170 38,177 40,603 +/- Extraordinary items 1,137 6,057 2,387 - -+/- Minority interest 95 104 102 110 115 Adjusted PAT 27,907 38,290 39,456 38,067 40,488 Adj. FDEPS (`/sh) 12.4 14.9 17.1 17.6 18.7 Adj. FDEPS growth (%) 25.3 20.4 15.0 2.7 6.4 Source: Company, Anand Rathi Research

Fig 3 – Cash-flow statement (` m) Year-end: Mar FY12 FY13 FY14 FY15e FY16e

Consolidated PAT 27,907 38,290 39,456 38,067 40,488 +Depreciation 2,335 2,513 2,955 3,402 3,822 Cash profit 30,242 40,803 42,411 41,469 44,310 - Incr./(Decr.) in WC (7,545) 4,295 8,147 4,877 5,262 Operating cash-flow 22,571 39,136 50,572 46,455 49,687 - Capex (2,734) (4,407) (7,605) (7,000) (7,000)Free cash-flow 19,837 34,729 42,967 39,455 42,687 - Dividend (8,762) (41,538) (32,441) (35,425) (37,955)+ Equity raised 336 73 0 - -+ Debt raised - 247 (387) - -- Investments (5,794) (4,629) (3,985) (28,500) (4,800)- Misc. items 1,307 6,321 - - -Net cash-flow 6,925 (4,796) 6,153 (24,470) (68)+ Opening cash 2,505 9,420 19,007 25,160 691 Closing cash 9,430 4,625 25,160 691 622 Source: Company, Anand Rathi Research

Fig 5 – PE band

HUVR 17x

25x

33x

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Source: Bloomberg, Anand Rathi Research

Fig 2 – Balance sheet (` m) Year-end: Mar FY12 FY13 FY14 FY15e FY16e

Share capital 2,162 2,163 2,163 2,163 2,163 Reserves & surplus 34,649 26,485 33,210 35,852 38,385 Net worth 36,811 28,648 35,373 38,015 40,548 Total debt 183 209 223 333 448 Minority interest 10,060 12,170 11,783 11,783 11,783 Def. tax liab. (net) (2,099) (2,085) (1,796) (1,796) (1,796)Capital employed 44,954 38,941 45,583 48,335 50,983 Net fixed assets 24,905 26,539 31,188 34,787 37,965 Investments 27,030 29,708 33,694 62,194 66,994 - of which, Liquid 27,030 29,708 33,694 62,194 66,994 Net working capital (26,945) (36,313) (44,460) (49,336) (54,598)Cash and bank balance 19,964 19,007 25,160 691 622 Capital deployed 44,954 38,941 45,583 48,335 50,983 Net debt (39,034) (38,631) (48,867) (52,897) (57,629)WC days (11.5) (13.4) (15.6) (15.7) (15.8)Book value (`/sh) 16.1 12.3 15.5 16.7 17.9 Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `628 Year-end: Mar FY12 FY13 FY14 FY15e FY16e

P/E (x) 50.7 42.1 36.6 35.7 33.5 P/B (x) 39.1 51.1 40.4 37.5 35.0 EV/sales (x) 5.7 4.9 4.7 4.3 3.9 EV/EBITDA (x) 38.2 31.7 32.9 29.5 26.7 RoAE (%) 89.6 105.2 123.3 109.1 108.0 RoACE (%) 92.7 94.3 88.8 88.8 92.8 Dividend yield (%) 1.2 2.9 2.1 2.2 2.4 Dividend payout (%) 60.6 124.1 75.8 79.5 80.1 RM to sales (%) 53.3 52.2 52.1 51.8 51.7 Ad spend to sales (%) 11.5 12.2 12.9 13.0 13.0 EBITDA growth (%) 46.5 20.7 (3.8) 11.5 10.6 EPS growth (%) 25.3 20.4 15.0 2.7 6.4 PAT margin (%) 11.5 12.0 13.0 12.2 11.8 Tax rate (%) 73.8 107.4 115.6 103.3 105.1 Staff cost to sales (%) 9.6 14.5 17.7 14.8 14.4 Source: Company, Anand Rathi Research

Fig 6 – Revenue break- up

Personal products

30%

Detergents21%

Soaps20%

Others12%

Tea & garden tea

11%

Canned & processed food

3%

Branded staple foods2%

Ice cream1%

Source: Company



Analyst meet highlights Focus on launching global products in India

HUL has been accustomed to introducing various products for Indian consumers such as Wheel, Close Up, and Fair & Lovely. It had also concentrated on acquiring businesses/brands in India such as the consumer business of Tata Oil Mills (Tomco). However, after attending the analyst meet, we believe the company is set on launching global products in India. After its global acquisitions it has rolled out shampoos such as Tressemme, and Tony & Guy in India. Within just 12 months from launch, Tressemme is now a `10bn brand in India. Dove hair and skin care products, variants of Axe deodorants have been rolled out across most of countries at the same time. Lipton Yellow Label tea was also re-launched in 70 countries in FY14.

We believe that aligning its range of products as well as launches in sync with the parent company will help HUL benefit from economies of scale and reduce research & development costs.

Aggressive launch of products for male grooming

On the success of Fair & Lovely men’s cream, HUL has increased the number of products in the men’s grooming sub-segment. It had introduced Vaseline men’s fairness cream nearly three years ago and has just rolled out a Ponds Men’s fairness range. It also indicated introducing various male grooming products under Axe. It indicated that male grooming would be one of the fastest-growing segments in the next decade.

Fig 7 – Portfolio for driving male grooming Brand Products Status

Rexona Men Deodorants Withdrawn

Fair & Lovely Mens Fairness cream Success

Vaseline Mens Fairness cream Moderate Success

Ponds Fairness cream, Facewash Just launched

Axe Deodorants, Talcum powder, shaving cream, After shave lotion Success


Aggressive investment in non-TV means of mass communication

HUL indicated that, of total ad-spend, expenditure on TV was over 80% whereas with other media such as mobile phones and the internet rapidly growing, expenditure on advertising on TV is ~76%, now. It indicated that it would increase expenditure on non-TV media.

It is showcasing brands as integral part of movies (e.g. Sunsilk in 2 States). HUL has introduced a unique entertainment system, ‘Kankhajoora tesan’. After a “missed” call to 1800 3000 0123, consumers can listen to songs and jokes for 15 minutes. Of these 15, HUL will air its advertisements for 2-3 minutes. Already ~12m users have tried this. HUL had also extended the promotion of Lifebuoy via stamps on rotis (Kya apne Lifebuoy se haath dhoye?)



Fig 8 – Aggressive investment in non-TV media Activity Medium Brands

Kankhajoora tesan Mobile All Stamp on rotis for washing hands Promotion in melas Lifebuoy Training school children Promotion in schools Lifebuoy, Pepsodent Prescription route for Oral care Promotion via doctors Pepsodent Free food samples Modern trade Kissan, Knorr Showcasing brands in movies Movies Sunsilk, Lakme


Increase in royalty rates

HUL has increased royalty rates and indicated the plan for a further increase in royalty. Royalty rates have moved up 50bps in Apr’14. They will move up a further 50bps in Apr’15 and 25bps in Apr’16. The company has not planned for any increase in royalty rate thereafter.

Fig 9 – Royalty as percent of net sales

1.25

1.65

2.05

2.45

2.85

3.25FY

13

FY14

FY15

e

FY16

e

FY17

e

(%)


Initiatives in trade to drive growth

As part of its overall growth strategy, the company has decided to increase the number of “Perfect Stores”. Investment in “Perfect Stores” helps HUL drive throughput per store and enhance in-store branding. It also helps traders increase revenue. Instead of utilising paper tapes, it is moving towards glow signs. As most of the launches are in the premium segment, it believes glow signs help maintain the premium image of such products.

It also indicated that ‘on-shelf availability’, an internal measure tracked by Unilever and HUL, has improved 900bps in 2013 from 2008. It also indicated plans to cut down SKUs by 30% to be more efficient in supply-chain and production management.

Fig 10 – Initiatives to drive off-take Initaitive Expected benefits

Drive the throughput per store Increase the Perfect store initiative

Better in shop promotions

Increase in number of Shakti Amma & Shaktimans Drive growth in rural sales

Increase on shelf availability Drive the revenues in stores

More usage of glow signs To drive growth of premium brands

To reduce confusion in trade Reduce number of SKUs by upto 30%

To improve efficiency of supply chain




Valuation

We value the stock at a target price of `510, at a target PE of 27x FY16e earnings. As Hindustan Lever continues to reel from the heat of keener competition in segments such as laundry, skin care and oral care, we expect it to continue investing in these categories. Royalty, excise duty and income tax rates are expected move upwards in FY15. We also believe delayed monsoon to impact revenue growth in rural areas. We expect it to report revenue and earnings CAGRs of just 10% and 5%, respectively. Hence, we believe that, at current levels, any stock-price upside has already been capped.

Fig 11 – Mean PE and Standard Deviation

Mean

+1SD

+2SD

-1SD

-2SD

15

22

29

36

43

50

Jun-

00Fe

b-01

Oct

-01

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ar-0

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ay-1

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Key risks

Lower raw material prices.

Less-than-expected competitive pressures.

Appendix Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. Important Disclosures on subject companies Rating and Target Price History (as of 1 July 2014)

HUL

1 2 34

5

6

7

8

9

170

270

370

470

570

670

770

Jan-

08

Apr-0

8

Aug-

08

Dec

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9

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Dec

-09

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Nov

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Mar

-11

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1

Nov

-11

Mar

-12

Jul-1

2

Nov

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Mar

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13

Oct

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14

Jun-

14

Date Rating TP (`)

Share Price (`)

1 12-Dec-08 Sell 207 240 2 12-May-09 Sell 218 225 3 16-Jul-09 Sell 249 266 4 16-Mar-10 Sell 204 227 5 27-Jun-11 Sell 265 318 6 08-Nov-11 Sell 330 382 7 08-Oct-12 Sell 466 560 8 09-Apr-13 Sell 440 471 9 02-May-13 Sell 510 584

The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.



Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5%

Anand Rathi Research Ratings Distribution (as of 1 July 2014) Buy Hold Sell Anand Rathi Research stock coverage (196) 60% 27% 13%

% who are investment banking clients 4% 0% 0%





Autos

Company UpdateIndia I Equities

Volume data – Jun ’14 (units) Jun ’14 yoy chg (%) mom chg (%) ytd FY15 yoy chg (%)

Passenger Vehicles 18,794 -1.7 -8.1 59,564 -8.4

4-wheel pick-ups 14,138 2.7 10.1 38,651 -10.2

3-wheeler 4,544 5.6 21.8 11,808 -4.5

CV 995 9.2 17.6 2,591 -0.3

Total Autos 38,471 1.0 1.6 1,12,614 -8.4

Tractors - Domestic 28,893 8.1 24.9 71,920 0.7

Tractors - Exports 991 -3.4 22.6 2,635 -17.3

Total Tractors 29,884 7.7 24.8 74,555 0.0

Total Volumes 68,355 3.8 10.6 1,87,169 -5.3


`

Rating: Hold Target Price: `1,250 Share Price: `1,187

Key data MM IN / MAHM.BO

52-week high / low `1269 / `742Sensex / Nifty 25516 / 76353-m average volume US$20.0m Market cap `732.7bn / US$12.2bnShares outstanding 590m

Shareholding pattern (%) Mar ’14 Dec ’13 Sep ’13

Promoters 25.29 25.24 25.26 - of which, Pledged 8.11 8.13 8.12Free Float 74.71 74.76 74.74 - Foreign Institutions 36.92 36.68 35.86 - Domestic Institutions 15.88 16.09 16.57 - Public 21.91 21.99 22.31

2 July 2014

Mahindra & Mahindra

Decent drive; Hold

Key takeaways

PVs continue to sputter. Higher fuel prices, a portfolio tilted towards the underperforming UV2 segment, and intense competition had caused sustained weakness in Mahindra and Mahindra’s (M&M) PV sales (incl. exports). However, the rate of decline has now been arrested to just 1.7%, the lowest in the past 13 months. The ytd decline, though, is higher at 8.4%. The overall auto division sales were higher by 1% yoy, boosted by other segments: three wheelers (up 5.6%), pick-ups (up 2.7%), and CVs (up 9.2%). With lower excise duty being extended till Dec ’14, the company expects sales to spurt in the run-up to the festive season.

Tractor sales decent. Despite concerns over monsoons, tractor sales were better than expectations. Domestic tractor sales were up 8.1% yoy, to 28,893 units, while tractor exports were lower 3.4% yoy to 991 units. Ytd tractor sales are flat yoy; our residual growth estimate is 6.9%.

Overall performance decent. With decent performance across the non-PV segments, M&M’s total volumes were up 3.8% yoy and 10.6% mom, to 68,355 units - slightly ahead of expectations. Ytd volume decline is 5.3% yoy; residual growth estimate is 7%.

Our take. UVs and the other automotive segments registered volume decline in FY14, and the same scenario could persist in 1QFY15 as well. While the UV portfolio comes off a lower base here on, short-term UV demand recovery in M&M’s key segments is likely to be restricted. Tractors will now be faced with a higher base and the possibility of a lower crop output due to adverse weather conditions. Thus, the short term appears to have very few upsides for the company. The long-term outlook, however, remains good with likelihood of agri-mechanisation, launches in the UV1 segment in FY16, and recovery in the CV cycle. We maintain Hold. Risks. Delay in rural demand recovery, keener competition, diesel price hike.

Standalone Financials (YE Mar) FY15e FY16e

Sales (`m) 4,36,251 4,87,131

Net profit (`m) 37,830 43,155

EPS (`) 61.6 70.3

Growth (%) 85.0 100.7

PE (x) 19.3 16.9

PBV (x) 14.0 11.8

RoE (%) 19.4 19.0

RoCE (%) 20.7 20.9

Dividend yield (%) 1.3 1.3

Net gearing (%) 30.9 29.2Source: Anand Rathi Research

2 July 2014 M&M – Decent drive; Hold


Quick Glance – Financials and ValuationsFig 1 – Income statement (`m)

Year-end: Mar FY12 FY13 FY14 FY15e FY16e

Net revenues 3,18,535 4,04,412 4,05,085 4,36,251 4,87,131Revenue growth (%) 36.2 27.0 0.2 7.7 11.7- Op. expenses 2,80,907 3,57,469 3,57,873 3,85,102 4,29,620EBIDTA 37,629 46,943 47,212 51,149 57,511EBITDA margin (%) 11.8 11.6 11.7 11.7 11.8- Interest expenses 1,628 1,912 2,592 2,455 1,930- Depreciation 5,761 7,108 8,633 10,691 12,170+ Other income 4,658 5,492 7,180 8,132 9,216- Extraordinary items -2,647 -1,056 -528 0 0- Tax 8,755 10,943 6,111 8,304 9,473Effective tax rate (%) 23.3 24.6 14.0 18.0 18.0Reported Profit 28,789 33,528 37,583 37,830 43,155Adjusted Profit 26,169 32,578 37,061 37,830 43,155Adj. Profit growth (%) 4.8 24.5 13.8 2.1 14.1Adj. FDEPS (`/share) 42.6 53.1 60.4 61.6 70.3Adj. FDEPS growth (%) 4.8 24.5 13.8 2.1 14.1Source: Company, Anand Rathi Research

Fig 3 – Cash-flow statement (`m) Year-end: Mar FY12 FY13 FY14 FY15e FY16e

Reported Profit 28,789 33,528 37,583 37,830 43,155+ Depreciation 5,761 7,108 8,633 10,691 12,170Cash profit 34,550 40,636 46,217 48,521 55,325- Incr./(decr.) in WC 909 -3,424 9,613 -81 -450Operating cash-flow 33,641 44,060 36,603 48,602 55,774- Capex 18,881 12,362 21,474 20,000 16,000Free cash-flow 14,760 31,698 15,130 28,602 39,774- Dividend 7,675 7,982 8,596 9,210 9,824+ Equity raised 9 6 0 0 0+ Debt raised 12,597 -922 5,181 -10,000 -5,000- Investments 13,848 15,230 -4,536 15,000 25,000- Misc. items 104 1,642 4,561 1,262 1,346Net cash-flow 5,738 5,929 11,690 -6,869 -1,395+ Op. cash & bank bal. 6,146 11,884 17,814 29,504 22,635Cl. cash & bank bal. 11,884 17,814 29,504 22,635 21,239Source: Company, Anand Rathi Research

Fig 5 – Standalone PE band

M&M10x

12x

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16x

18x

20x

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Fig 2 – Balance sheet (`m) Year-end: Mar FY12 FY13 FY14 FY15e FY16e

Share capital 2,945 2,952 2,952 2,952 2,952Reserves & surplus 1,18,766 1,44,227 1,64,960 1,92,319 2,24,305Net worth 1,21,711 1,47,179 1,67,912 1,95,271 2,27,256Total debt 35,808 34,886 40,067 30,067 25,067Def. tax liab. (net) 4,607 5,203 8,897 8,897 8,897Capital employed 1,62,126 1,87,268 2,16,875 2,34,234 2,61,219Net fixed assets 50,808 58,213 71,054 80,363 84,193Investments 1,03,105 1,18,335 1,13,799 1,28,799 1,53,799Net working capital -3,671 -7,094 2,519 2,438 1,989Cash & bank bal. 11,884 17,814 29,504 22,635 21,239Capital deployed 1,62,126 1,87,268 2,16,875 2,34,234 2,61,219No. of shares (m) 589 590 590 590 590Net debt -79,181 -1,01,263 -1,03,236 -1,21,366 -1,49,971Net debt / Equity -0.7 -0.7 -0.6 -0.6 -0.7WC turn days -16 -5 -9 -7 -7Book value (`/sh) 206.6 249.3 284.4 330.8 385.0Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `1187 Year-end: Mar FY12 FY13 FY14 FY15e FY16e

Consolidated P/E (x) 23.2 19.4 16.5 14.0 11.8 P/B (x) 5.7 4.8 4.2 3.6 3.1 EV/EBITDA (x) 19.2 15.3 15.1 13.8 12.3 RoE (%) 21.5 22.1 22.1 19.4 19.0 RoCE (%) 22.4 24.1 21.1 20.7 20.9 Dividend yield (%) 1.1 1.1 1.2 1.3 1.3 Dividend payout (%) 33.2 27.4 26.4 27.7 25.9 Debt to equity (%) 0.3 0.2 0.2 0.2 0.1 Standalone P/E (x) 27.8 22.4 19.7 19.3 16.9 Cash P/E 22.1 17.8 15.5 14.6 12.8 EV/sales 2.0 1.5 1.5 1.3 1.1 Inventory days 27 22 26 26 26Receivables days 23 20 23 23 23Payables days 56 51 55 55 55Asset Turnover 1.9 2.1 1.8 1.8 1.8 Source: Company, Anand Rathi Research

Fig 6 – Standalone product mix

0

50,000

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1QFY

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3QFY

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Automotive Tractors

Source: Company

2 July 2014 M&M – Decent drive; Hold


Fig 7 – Yoy growth in volumes

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(Units)

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Source: Company

Fig 8 – Auto segment sales weak

20,000

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Automotive yoy growth (RHS)

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n-11

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(Units)

-30.0

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Source: Company

Fig 9 – Tractor sales decent

10,000

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(Units)

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-45.0

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75.0

95.0

(%)

Tractors mom growth (RHS)

Source: Company

Appendix Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. Important Disclosures on subject companies Rating and Target Price History (as of 1 July 2014)

M & M 16

15

1413

12

11

10

9

8

7

6

5

4

3

21

100

300

500

700

900

1,100

1,300

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08

Apr-0

8

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-08

Apr-0

9

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Apr-1

0

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Date Rating TP (`)

Share Price (`)

1 25-Feb-09 Hold 159 141 2 21-Apr-09 Hold 232 225 3 04-Jun-09 Buy 440 349 4 31-Jul-09 Buy 528 426 5 30-Oct-09 Buy 567 463 6 05-Apr-10 Buy 650 534 7 03-Nov-10 Buy 899 755 8 10-Feb-11 Buy 833 654 9 08-Oct-12 Hold 953 869

10 07-Dec-12 Hold 980 930 11 10-Apr-13 Hold 919 838 12 10-Jul-13 Hold 1,015 986 13 14-Aug-13 Buy 1,015 870 14 09-Oct-13 Buy 1,037 858 15 07-Apr-14 Buy 1,100 1,006 16 02-Jun-14 Hold 1,250 1,230

The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.



Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5%

Anand Rathi Research Ratings Distribution (as of 1 July 2014) Buy Hold Sell Anand Rathi Research stock coverage (196) 60% 27% 13%

% who are investment banking clients 4% 0% 0%




Appendix Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.



Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5% Anand Rathi Research Ratings Distribution (as of 1 July 2014) Buy Hold Sell Anand Rathi Research stock coverage (196) 60% 27% 13% % who are investment banking clients 4% 0% 0%















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