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Hindustan Lever
The Hindustan Lever (HLL) growth story seems to have continued well into the third quarter. With the company posting a 43.28 per cent jump in earnings growth for the third quarter ended September 1998, HLL has not disappointed once again. In fact, the earnings growth was suppressed, largely owing to the charge of an exceptional item of Rs 12.93 crore, which was the net stamp duty payable with respect to the amalgamation of erstwhile Pond's (India).
HLL's earnings growth for the nine months ended September 1998, too, is buoyant, with profits improving 39.82 per cent to Rs 576.33 crore. Incidentally, last year's profits were bloated owing to an exceptional revenue accrual of Rs 6.70 crore, which arose primarily due to the differential between the provision of Rs 7.80 crore (loss on disposal of fixed assets) and revenue of Rs 14.50 crore from the escrow account relating to the preferential allotment of shares to Unilever Plc.
Furthermore, the earnings growth was achieved despite asharp increase of 92.07 per cent in the depreciation and amortisation charge, which stood at Rs 80.42 crore for the nine-month period. This, analysts state, is a consequence of investments in the Lakme trademarks and the on-going capex at HLL's factories. Improved cash flow and the fact that a majority of HLL's debt is an interest-free tax loan have helped limit the company's interest burden to Rs 24.53 crore (Rs 23.07 crore) for the nine-month period.
Another factor that has helped buoy earnings is a high other-income component. Ordinarily, while this would have diluted the quality of earnings for a company, the fact that this is a recurring income (which comprises dividend from subsidiaries and dividend income from investments) bodes well for HLL. In fact, other income accounts for almost 17.58 per cent of the PBT.
While the 22.96 per cent growth in turnover at Rs 7,138.21 crore for the nine months looks low, when taken against the backdrop of an overall recession and increasing competition, it isinspiring. The growth achieved in its main lines of business, namely, soaps and detergents, personal products, beverages, branded staples and culinary products, has been again higher than the market growth in these segments, a fact which is reflected in the increased market shares of the products in these segments. A strong export performance (especially tea exports) has also helped. The dropsy scare also brought about a marked improvement in offtakes for HLL's oils and vanaspati-branded products in the third quarter, which together with Speciality Chemicals was the only other laggard in the first half.
Furthermore, despite the increased cost of raw materials and ad-spend on brand building for new categories of ice-cream, culinary products and personal products, margins at HLL were buoyant. In fact, operating margins improved from 9.55 per cent to 10.86 per cent for the nine months ended September 1998. The story has been the same for the third quarter, with margins showing a marked improvement from 10.90per cent to 13.8 per cent.
Given this background, and the fact that while volumes in detergents and stronger margins in the personal-care range would boost revenues, competition and investments in brand building could put HLL's operating margins under pressure.
Kalpataru Power Transmission
Kalpataru's operating-profit margins in the second quarter of 1998-99 are the lowest in the last six quarters. Though the Rs 7.64-crore net profit in the first half of 1998-99 is higher by 75 per cent, compared with the corresponding period of the previous year, the P/E will improve only marginally. This is because Kalpataru is still remembered for not mentioning its foray into real estate in its offer document and diversifying in a period of less than six months after it. Second, the profit after tax (PAT) in the second quarter is lower by 17 per cent, versus the first quarter. Third, the effective tax rate for the company was 24.6 per cent in 1997-98 (calculated by arriving at PBT after accounting forprovision for decline in value of investments, whereas the company has calculated PBT prior to providing for decline), and as was the case last year, tax has not been provided for in the first-half results. The state of the power sector (particularly T&D) is dismal, and the second half is not likely to be any better than the first.
J&K Bank
Jammu & Kashmir Bank's 76 per cent increase in net profit for the half-year ended September 30, 1998, compared with the corresponding period last fiscal, is owing to the fact that while the interest earned has gone up by 43 per cent, the interest expended went up by only 29 per cent.
During the year to September 30, outstanding investments rose by 49 per cent, while advances were higher by 37 per cent. This should have led to pressure on spreads, but operating profits as a percentage of interest earned was 28.6 per cent during the half-year ended September 30, 1998, compared with 25.4 per cent during the corresponding period of 1997. The funds garnered throughthe initial public offer helped, but the issue was for Rs 70.30 crore in May 1998, which means that the interest on the funds raised could not have made much of a difference during the period--the growth in net profit, comparing half-years, has been Rs 19.19 crore.
Annualised earnings over the half-year on expanded capital works out to Rs 18.72, and with non-performing assets at a mere 4.57 per cent of advances, there is little reason for the scrip to be quoting at its current level of around Rs 23. Capital adequacy is very high at over 20 per cent, and increased lending should lead to higher profits for the next half-year.
With contributions by Percy Dubash and Urmik Chhaya
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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