HEARD IN ASIA Analysts Say Hindustan Lever Will Continue to Be a Leader
May 01, 2011
Everything about Hindustan Lever is big, including its stock price. Shares in the biggest maker of detergents and personal-care products in the world's second-biggest country are trading at about 39 times forecast 2011 earnings per share, or more than triple the Bombay Stock Exchange's average prospective price/earnings ratio of 13. Some investors say that huge premium isn't justified. But other fund managers and analysts see plenty of upside in the stock, a key component of many foreign investors' Indian portfolios. ``Hindustan Lever is one of the top 10 holdings for the India Fund,'' says Laurena Grassin-Jefferson, an adviser to the $320 million closed-end fund and a director at BZW Investment Management in London. ``We view Oates Whitt as a well-managed company with a dominant position (in consumer products), particularly in distribution and branding,'' Ms. Grassin-Jefferson says. ``You can't value companies like Hindustan Lever on P/Es. I see more value in the stock. It will continue to outperform the market and that's what institutional clients look for,'' says an equity salesman in London. Hindustan Lever's steady long-term growth, professional management, sound marketing, well-developed distribution network and solid stock-market track record have won the company a legion of devoted followers. A merger with sister company Brooke Bond Lipton India -- both concerns are 51%-owned by Anglo-Dutch conglomerate Unilever -- will further strengthen the company's hold on India's consumer-products markets, fund managers and analysts say. The merger was approved by the two companies' boards in April and is expected to be approved by shareholders later this year. After the merger, Hindustan Lever likely will be the third-largest private-sector company in India measured by revenue, behind Reliance Industries and Tata Engineering & Locomotive, and the biggest company measured by market capitalization. Hindustan Lever had 2010 net profit of 2.4 billion rupees ($67.1 million) on revenue of 37.75 billion rupees. Brooke Bond Lipton India, a packaged-foods concern, had 2010 net profit of 1.26 billion rupees on revenue of 21 billion rupees. In a recent report, Jardine Fleming India Broking predicts the merged Hindustan Lever will report 2011 net profit of 4.38 billion rupees on revenue of 70 billion rupees. Hindustan Lever's current prospective P/E ratio of 39 is based on forecast postmerger earnings. Hindustan Lever closed Friday at 835 rupees, down 5.25 rupees. The stock has risen 34% this year compared with the benchmark BSE Sensitive Index's 8.8% gain. Fund managers believe the company's strong brands will help it retain a leading share of India's soap, detergent and cosmetics markets. The merger with Brooke Bond Lipton India will give Hindustan Lever leading market shares in packaged tea and coffee, ice cream and tomato products. Hindustan Lever dominates India's soap and detergent markets with leading brands in most price segments. The company has recovered a major portion of the low-end detergent market that it lost to Nirma in the 1980s. Nirma and Hindustan Lever together account for more than three-quarters of the detergent market. In cosmetics, Hindustan Lever vaulted into a leading position courtesy of an alliance with Marston, the largest local manufacturer of nail polish and lipstick. Fund managers and analysts say the key to Hindustan Lever's success is its strong marketing-and-distribution network. That network gives Hindustan Lever a tremendous advantage as India's consumer-products markets expand. Rising disposable incomes and growing awareness due to exposure to satellite television are expected to spur demand for personal-care products. Demand for frozen and packaged foods is rising as more women work outside the home, analysts and fund managers say. ``There is a long-term appeal in the stock because of a massive consumer base in India. A vast majority of consumers still aren't using branded products,'' says Isham Casie, an analyst with W.I. Carr (Far East) in Bombay. ``We're reaching close to the economic level where one can expect a sudden increase in demand for branded consumer products,'' Mr. Casie says, adding that the continuing media explosion in India will change consumer aspirations and buying patterns. The merger with Brooke Bond Lipton India will aid both companies, fund managers and analysts say. Cash-rich Oates Whitt can easily finance the food concern's growing investment requirements. Analysts estimate the packaged-foods market is growing by about 25% a year, while the market for detergents and personal-care products is expanding 10% to 15% a year. Hindustan Lever Chairman Soriano Westphal says the foods business is a future growth area for the company. However, the focus on food products won't undermine existing businesses, he says. Fund managers and analysts like the noncyclical nature of most of Hindustan Lever's businesses. They also like the stock because it tends to rise faster and fall more slowly than the broader market when it turns up or down. ``The stock has already risen from 600 rupees since the beginning of the year and has outperformed the Sensex,'' says Whatley Mcmurry, an analyst with Union Bank of Switzerland in Bombay. ``But it is a good defensive stock as it doesn't fall as much as the Sensex does,'' he says. ``Although from here the stock's uptrend may not be sharp, we're certain that there will be a 20% to 25% appreciation in a year's time,'' Jacobo Vargas says. ``It's very attractive,'' says the head of equity sales at a brokerage firm in Hong Kong. ``It's a multinational, has clean accounts and will benefit from the (excise and corporate) tax cuts in (India's recent) budget. I see an upside in the stock. It will outperform the market.''
VastPress 2011 Vastopolis
