BackBrokerages upgrade HUL’s stock despite flat December outlook
Eight brokerages have upgraded their ratings on HUL this month on falling raw material prices and a changing macro-economic environment
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Mumbai: Hindustan Unilever Ltd (HUL) will not see much improvement in sales and volume growth for the quarter ended December, but that has not deterred analysts from upgrading the stock, as they bet on a better fiscal 2016 for India’s biggest maker of home and personal care products.
HUL shares have surged more than 16% so far this month, far outperforming Sensex, which is marginally lower so far.
Eight brokerages have upgraded their ratings on HUL this month on falling raw material prices and a changing macro-economic environment, even though they acknowledge that any improvement in performance may be gradual.
The maker of Lux soaps, Knorr soups, Kissan tomato ketchup, HUL will likely report volume growth of 4-6% in the December quarter, said analysts at research firms Religare Capital Markets Ltd, Kotak Institutional Equities Research, Motilal Oswal Securities and India Infoline Ltd’s Insitutional Equities Research desk, all of whom have upgraded the stock during the month.
Volume growth for HUL has ranged 4-6% for the last eight quarters as India’s economic growth slowed down and inflation remained high, forcing consumers to cut back on small and discretionary spends.
“The upgrade is not based on quarterly results. This quarter, the results will be muted; however, we will see the improvements kick in from financial year 2016," said Arnab Mitra, analyst for institutional equities (India research) at Credit Suisse Research, who upgraded the stock from neutral to outperform on 6 January.
“We believe growth is close to bottoming out. While soft trends may continue over 2HFY15 (affected to some extent by the delayed onset of winter), we expect a revival in volumes starting in FY16 aided by improved consumer sentiment and promotional activities," said Latika Chopra and Ebru Sener Kurumlu, analysts at JP Morgan Asia Pacific Equity Research in a report dated 6 January, which upgraded HUL to neutral from underweight. In 2016, analysts expect both the topline and bottomline to improve for HUL.
In his report, Mitra of Credit Suisse Research said that earnings during FY15-17 will grow at a compounded annual growth rate (CAGR) of 21%, as against 10% in the past two years.
Moreover, a fall in the cost of key raw materials could also benefit HUL, even though the company hasn’t always benefited when commodity prices fell. Prices of raw materials like palm fatty acid distillate (PFAD), linear alkylbenzene (LAB) and crude derivatives have declined by 10-40% over the past six months.
“We expect HUL to retain some input cost deflation gains despite price reductions and estimate gross margins to expand meaningfully by approximately 200 basis points in FY16," said the JP Morgan report.
A basis point is a hundredth of a percentage point.
In the December quarter, HUL has already taken a 4-5% price cut across key soap brands—Dove, Lifebuoy and Hamam. Promotions are also underway on select stock-keeping units (SKUs) across leading laundry brands—Surf Excel and Rin, said the JP Morgan report.
In the past, a fall in price-led growth and increased competitive intensity has taken away the benefits of lower commodity prices, said Credit Suisse. For instance, Cincinnati-based Procter and Gamble Co.’s (P&G) Indian subsidiaries have led two serious price wars—in 2004 (detergents and shampoo) and 2009 (detergents)—which prevented HUL from reaping the benefits of input cost deflation in those years, the brokerage house added.
This time may be different as P&G has changed its emerging market strategy to focus on profitability, while ITC Ltd, with soap brands like Vivel, Superia and Fiama DiWills, has also reduced its aggression in the home and personal care segment to focus on foods, said Credit Suisse analysts.
HUL has also been increasing its distribution bandwidth.
In 2013, HUL added one million stores under direct coverage. Earlier, it took three years— 2009-12—to add one million stores. Unilever Plc’s Indian subsidiary now has a direct reach to 3.2 million outlets. “Direct coverage enhancement builds a key competitive advantage and would ensure the consistency of service and better assortment at more stores," said the JP Morgan report. The changing macro-economic environment with improved consumer sentiments will see HUL benefiting as the premiumization trend, which had slowed in the past two years, will once again take off, said analysts.
HUL’s stock closed at ₹ 884.70, down 1.33% on the BSE on Tuesday, breaking a rally which stretched out over eight consecutive sessions. Sensex closed at 27,425.73 points down by 0.58%.
HUL’s 16.48% gains so far this month has put the stock on track for its best January performance since 1999, said a Bloomberg report on Tuesday.
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