Q3 earnings: Will HUL, Asian Paints outshine ITC?

Cigarettes major ITC reported a better-than-expected 21 percent year-on-year rise in third quarter net profit at Rs 2,052 crore, helped by strong growth in FMCG and agri businesses.

Varun Lohchab of Religare Capital Markets who tracks the fast-moving consumer goods (FMCG) space shared his outlook on that. He said, ITC Q3 numbers were in line with expectations .The PAT growth was a bit above expectation and even the non-tobacco FMCG growth surprised positively, he added. He maintains a hold on ITC with a target price of Rs 305 per share  but sees limited upside from current levels. With regards to Hindustan Unilever, which is expected to announce Q3 resutls tomorrow, he expects EBITDA margins to improve by 150 basis points (bps) and 7 percent volume growth. However cautions that HUL will see a correction, if volume growht is below 7 percent. Since festive season has been good for pain campanies, he expects volume growth of around 8 percent for Asian Paints for domestic business. Below is the edited transcritp of his interveiw on CNBC-TV18 Q: Your thoughts on ITC and whether numbers were in line with your expectations? A: Yes numbers were pretty good. At profit after tax (PAT) level they were slightly ahead of estimates and even at a top line level. At EBITDA level they were largely in line. Both their growth driver that is cigarettes and fast-moving consumer goods (FMCG) did pretty well. Cigarettes EBIT grew by around 21 percent which was a healthy growth.  The other FMCG revenues grew by 30 percent, so net-net good earnings but not major positive surprise. Q: Are you happy with the pace of FMCG because some people pointed out that it was cigarettes that had bailed ITC out? A: No, actually from other FMCG we were expecting around 25 percent growth and they have delivered 30 percent. So they have not shown any signs of slowdown in that segment whereas there is some degree of slowdown when you look at the numbers of other FMCG companies. Clearly, on other FMCG they have continued a good show. The only disappointment in other FMCG was slightly on the losses side. We expected that losses to come down more on year on year basis. But still again out there from a trajectory basis they continue to move closer to breakeven pretty fast. Q: Have you redone targets for ITC in terms of earnings or would you wait to see what happens with the Budget and then take a call? A: On earnings we haven’t changed our estimates at all. We maintain our FY13-14 and FY15 estimates. However, we have rolled forward our valuation and therefore our new target price is now Rs 305 versus Rs 295 earlier. But we have maintained our hold rating as we see limited upsides from current levels. Q: What do you expect to hear from Hindustan Unilever (HUL) tomorrow? A: On HUL, we believe market is quite jittery ahead of the numbers. We expect the company to report around 7 percent in terms of volume growth and overall 15 percent revenue growth. However, adjusting for the exports demerger the reported revenue growth will be close to 12 percent. We believe EBITDA margins should expand on year on year basis by around 150 bps. So we are expecting EBITDA growth of around 20 percent and PAT growth also of around 20 percent. We are slightly ahead of consensus out there. We don’t think earnings will be hugely disappointing. Q: The stock has corrected quite a bit from its recent high and has come down to Rs 480 now. Do you think 7 percent volume growth will be well received or will be received with caution by the street? A: If they deliver 7 percent it should be taken positively by the street. Anything below that would be a slight worry because if you see last quarter there was a slowdown to 7 percent and if they move down further to say 5-6 percent then you could see negative surprise. However, if it comes to 7 percent there would be a relief rally in the stock. Q: Asian Paints will be reporting today as well what are your expectations from that one? A: On Asian Paints we are expecting around 15 percent top line growth. Festive season has been quite decent for the paint companies. We expect around 8 percent volume growth in the domestic business. There is a pricing element of around 10 percent so domestic business should report around 17-18 percent top line growth and at a consolidated level around 14-15 percent top line growth. EBITDA margins should expand on year on year basis; we are expecting around 200 bps increase because raw materials have been favourable. We need to see if they have to step up their rate spends significantly to get that growth in which case EBITDA margins could be slightly lower. But still they would expand on a year on year basis. Q: So if you had to choose between HUL and ITC both of which have corrected off late, which one would you prefer? A: Both of them are hold rated for us, we had downgraded both of them in September-October. Very little to choose right now but it seems that HUL has undergone slightly more price correction compared to ITC. HUL is coming closer to our entry point which was around these levels Rs 470-480, whereas for ITC we believe would be Rs 270-275 would be the right entry point. We have slight bias towards HUL at this point of time. However, in both of them we fail to see meaningful upsides from current levels.