- 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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