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HLL: Bonanza for shareholders

Oct 10, 2001

HLL, the largest FMCG company in India, has finally decided to utilize its surplus cash reserves in the best possible manner. The company which has a cash balance of Rs 5 bn as on December ’00, plans to issue one debenture (face value of Rs 6, coupon rate of 9%) for every equity share held. At first glace, this might sound complicated. However, a face value of Rs 6 per debenture is equivalents to a payment of 600% dividend, staggered over the next three years. This is much higher than 350% dividend declared by the company in FY01.

The company’s reserves were in excess of Rs 22 bn as on December ’00. The bonus debentures will be issued by drawing reserves amounting to Rs 13.2 bn (through a book entry whereby secured debt would increase and reserves would reduce by the same amount). The total outflow on account of this exercise would be Rs 14.6 bn, as HLL would pay dividend tax on the same @ 10.1%. As per the scheme, the debentures would be redeemed at par in two equal installments in the second and third year from the date of issue.

Financial snapshot
(Rs m) FY01
Net profits 13,101
Cash profits 14,410
Equity capital 2,201
Reserves 22,682
Dividend payout ratio 58.8%
Total debt 1,116
Debt to equity ratio 0.0
Interest payment 131
Avg. interest rate 11.2%
Cash in hand 5,221
Over the past few years, HLL has been carrying large reserves in its balance sheet (both in terms of cash and investments). This bonus issue would not impair the company’s ability to execute any acquisitions, as there is no immediate cash outflow. Infact the company’s returns on networth (RONW) would jump to about 85% from the current 53% as a result of this ‘book entry’. It would still be able to utilize its excess cash over the next 2-3 years. HLL anyways generates cash profits of over Rs 10 bn every year (after dividend payment, it would be Rs 4.5 bn for FY02). Therefore, even after paying out this large one time ‘bonus’ the company would continue to be liquid.

The issue will also add shareholders wealth, as investors would get these debentures free of cost. They can earn interest on the same and get cash on redemption. Unilever, which is the largest shareholder, will ofcourse be the largest beneficiary of this payout.

However, the bonus would trim the company’s earnings growth, which is expected to be in the range of 12% - 15% (excluding extraordinary adjustments) for FY03.

Another positive announcement is an increase in FII limit to 49% from the current 24%. HLL’s board will meet on October 16 to consider this proposal. Technically, this would increase the company’s weightage in MSCI index and would create more demand for the stock considering its defensive nature.

At the current market price of Rs 230, HLL is trading at a P/E of 28 times FY03 projected earnings.

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