Financial Times

Hemas improves, sales tax cuts not fully passed to consumers
Conglomerate Hemas Holdings Ltd. (HHL) has improved net margins in its personal care sector despite a fall in revenue by revising product pricing and also owing to lower taxes that were not passed on to consumers.

The company, controlled by the Esufally family, has reported strong third quarter results, with a 43 percent year-on-year (YoY) growth in revenue supporting a 49 percent YoY growth in net profit to Rs 236 million.

HHL is on the look out for acquisitions in the personal and health care sectors and possibly food and beverage firms, stock brokers Asia Securities said in a research report.

The brokers said they were maintaining their FY05E net profit forecast of Rs 647 million, up six percent YoY, ahead of meetings with management. "Earnings growth is forecast to pick up to 30 percent YoY in FY06E with the group estimated to report a net profit of Rs 840 million amidst enhanced contributions from its power and personal care sectors," Asia Securities said.

Hemas has "sustainable profit growth potential" through its exposure to the less volatile sectors of the economy such as personal consumption and power, and has high value creation with return on equity of 28.4 percent, well above those of its peers, the brokers said.

HHL's personal care sector revenue declined by 16 percent YoY to Rs 663 million in the third quarter of the 2005 financial year. The YoY dip in 3Q05 revenue is primarily due to HHL's discontinuation of the Procter & Gamble distribution agency in November 2004, Asia Securities said. P&G sales contributed around 20 percent of revenue to HHL's personal care sector in FY04, or around Rs 600 million, although its net profit contribution was less than Rs 250 million.

"The sector's net margins have however improved from 8.9 percent in 3Q04 to 12.8 percent in 3Q05 on the back of price revisions to selected products, reduced sales of low margin P&G products and a more favourable tax structure following the standardization of VAT to a single rate of 15 percent from 1 January 2004," Asia Securities said.

"The sales taxes applicable to many of HHL's personal care products fell from 20 percent to 15 percent, with the benefits not being fully passed on to consumers." While the top line growth was driven by all key sectors, excluding the personal care sector, a first time contribution from HHL's power sector and an improved performance from its garments sector supported profitability in 3Q05.

The personal care sector, which was the biggest contributor to both HHL's revenue and net profit up to 2Q05, has lost its dominance in 3Q05 with the emergence of the power sector.

Hemas is planning to enter the adult soap market in the near term and considering acquisition opportunities to sustain sector earnings growth, given the competition from industry leader Unilever and imports rising in an inflationary environment, the brokers said.

The 100 MW Rs 6.2 billion thermal power project, Heladhanavi, in which HHL has a 50 percent stake, is forecast to contribute Rs 50 million and Rs 150 million in FY05E and FY06E respectively. "It appears that the 3Q05 returns are slightly ahead of our expectations," Asia Securities said.

Hemas is still on the look out for a strategic partner for its apparels business and exploring further acquisitions. Following its recent investments in Associated Hotels and Exchange and Finance Investments, HHL also ventured into the feminine hygiene market by purchasing sanitary napkin brand Fems for about Rs 25 million in September 2004. The mid-market brand has a 20 percent share of the country's fast growing Rs 300 million feminine hygiene market, and production will continue to be outsourced initially.

"HHL has a good track record of successful acquisitions, value addition and brand development and we anticipate further acquisitions in its core businesses of personal and health care, with the group likely to leverage its marketing and distribution skills on a greater scale," Asia Securities said.

"We would also not rule out selective F&B sector acquisitions as the group looks to accelerate its rate of growth." HHL is also likely to evaluate leveraging its health care sector expertise into related areas such as nursing, nurse training and hospital operations in the longer term.

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