Brokerage upgrades prop up HUL stock

In the last one week, the HUL stock has risen 19 per cent as foreign and national brokerages upgrade their stock recommendations on the back of a strong commodity correction

The scrip of Hindustan Unilever (HUL), India’s largest fast moving consumer goods (FMCG) company, snapped its record rally on Tuesday after it ended over one per cent lower. But analysts tracking the stock, up 18 per cent in about a week, could see further upside.

Seven brokerages, including Deutsche Bank, Credit Suisse and JPMorgan, have upgraded the stock ahead of its third quarter results announcement on January 19.

According to analysts, HUL could report strong margins in the third quarter, thanks to a price correction in crude oil and other inputs. Crude oil has crashed 50 per cent in recent months. HUL, according to analysts, has around 35 per cent exposure to crude derivatives. Also, price of palm oil, used to make soaps, fell about 20 per cent last year.

 

“Our HUL upgrade (to ‘Buy’) is premised on: a) strong investments in industry-leading capability improvements in distribution; b) input cost correction providing a tailwind for volume growth; c) low-unit-packs in premium products that are outperforming the portfolio, a lead indicator of an upturn; and d) the tax rate increases have optically magnified headline P/E," said Deutsche Bank, in its January 5 report.  

Credit Suisse, which followed with its stock recommendation report on January 6, said, “We upgrade earnings by four per cent to build in lower input costs in a structurally weaker competitive environment. Our estimates are eight per cent higher than consensus.  We expect 21 per cent earnings CAGR (compound annual growth rate) over FY15-17, as against 10 per cent CAGR  over the past two years. We also expect volume growth to recover in FY16, which will support rich valuations.”

Incidentally, speculation of another open offer by Unilever, the parent of HUL, is also doing the rounds, though this could not be confirmed at the time of going to press. Anglo-Dutch major Unilever, the world’s second-largest consumer goods company, holds 67.23 per cent stake in its Indian subsidiary, HUL. Unilever came out with an open offer in July 2013 in what was one of the largest open offers by a multinational company in an Indian entity, at $5.4 billion (or Rs 29,200 crore).

HUL’s rise, incidentally, came even as ITC struggled on the bourses on account of a regulatory overhang. In the last one week, ITC’s stock price came down from levels of about Rs 365 per unit to nearly Rs 358 (Monday’s close). It closed trade on Tuesday marginally up at Rs 360.25 per unit. ITC, however, has seen a sharp fall in its stock price at nearly 10 per cent in the last one month.

Analysts expect regulatory issues on the cigarettes side of the business to continue exerting pressure on the ITC stock. This is likely to increase in the run-up to the Budget as the fear of an impending tax hike could spook investors, analysts said.