- Recent de-rating
unjustified — HLL's current valuations seem to be building in the
worst-case scenario, and we see the recent stock de-rating as
unjustified. The stock has been unduly de-rated post a disappointing 4Q,
which we believe was a one-off. Fundamentals are on an improving
trajectory, and its operating parameters are looking up.
- Fundamentals are improving
— Sales growth has picked up and margins have been improving despite
cost pressures. HLL has also started to gain ground on market share in
its key segments of late. HLL is investing behind new products in the
high-margin cosmetics segment, benefits of which will accrue. It is also
likely to aggressively expand its foods business in 2007.
- Positive surprises likely —
HLL's margins could surprise positively; HLL had increased its ad-spend
in 20006, which could be curtailed in 2007. HLL still makes no money on
its detergents portfolio (20% of sales). Easing of competitive pressures
here could see an uptick in margins. We do not rule out an acquisition in
the foods segment to kick-start HLL's stated expansion in foods.
- Valuations at near
historical lows — Current valuations are near historical lows and are
disconnected to fundamentals. The stock is trading at 17.9x08E P/E,
offers 2-year EPS CAGR of 20.5% and its capital efficiency ratios are
among the best in the sector (78% ROE), and improving. In addition, the
stock offers a dividend yield of 4%, which should support the stock
price
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