HUL's earnings may grow at a modest 6.5% CAGR over FY13-15

Analysts believe that consumer stocks are at risk because economic growth is 'screeching to a halt'

For long now analysts have been putting a "sell" call on Hindustan Unilever. Analysts unanimously advised investors to sell as the stock prices were expected to fall after the offer closed. However, share prices held on, till very recently. But with GDP growth falling to 4.4% in the June quarter of the current fiscal, analysts are back with “sell” calls as earnings are expected to fall.

Analysts believe that the consumption story, which has been driving consumer stocks over the last two years, is at risk as economic growth is “screeching to a halt”. Between FY2007-2013, Hindustan Unilever’s earnings per share grew by 13% CAGR. However, this is expected to halve to 6.5% between FY13 and FY15 CAGR.

The company’s current share price poses risk as it won’t be supported by growth in earnings. HUL has always traded at a 26% premium to the sector since 2008, but at present it is trading at 46% premium to the sector.

The double digit earnings growth was largely driven by its premiumization drive across portfolio of brands. With volume growth falling to single digit levels (5-6%), analysts expect revenue growth to be no more than 11 and 14%, respectively, for FY14 and FY15. Operating margins too are expected to come under pressure due to higher royalty payouts, inflation in media costs after TRAI’s recent ruling and inflation in input costs.

Sbicap Securities expects operating margins to decline by 105 basis points.

Going by the challenging environment, the stock’s steep valuation multiples of 40.3x and 36.1x for FY14 and FY15 is unlikely to sustain.