HUL: Why are analysts recommending a sell?

Hindustan Unilever (HUL) recently conducted an analyst meet. Here are the key takeaways and reasons why analysts maintain a SELL rating on the counter.

Ritwik Rai, analyst, Kotak Securities (Private Client Research)

Unilever continues to look to grow consistently, sustainably, profitably with high focus on emerging markets, which constitute 46% of Unilever's sales. The company will continue to focus on enhancing distribution, innovation, and simplification and agility to grow in these markets. The company has prudently invested in innovations as well as distribution and shall remain well - placed to utilise growth opportunities.

We find it encouraging that the company's new premium launches (TRESemme, Magnum) are finding almost instantaneous acceptance; this bodes well for the company's margins over the long-term. Continued commitment on enhancing reach will, we believe help the company strengthen its core even further, raising entry barriers significantly.

However, valuations remain rich, at 31.3x PER FY16E. We see little possibility of earnings upgrades in the near-term, given weak economic backdrop, especially in the rural areas (HUL's sales to rural India account for c. 50% of total). While HUL's valuations compare favourably with other MNC FMCGs, we see better value in domestic FMCGs, as growth prospects remain comparable/ favourable.

In our coverage universe, we continue to prefer Dabur, Marico (25-27x FY16E PER) over HUL. We continue to value HUL at 29X FY16E PER, or Rs 578. The stock has run up 9% since our last update, which leads us to downgrade HUL to SELL on widening price value gap.

Anand Rathi Research

Compared to the earlier strategy of launching products such as Wheel, Close Up, Fair & Lovely which are suitable to Indian consumers, HUL now seems focused on introducing global products in India. Dove Skin Care range, Axe Deodorants, variants of Lipton tea, Tressemme and Tony & Guy shampoos have been rolled out simultaneously in most countries where Unilever operates. We believe this would help due to economies of scale and reduce R&D costs.

We value the stock at a target price of Rs 510, at a target PE of 27x FY16e earnings. As Hindustan Lever continues to reel from the heat of keener competition in segments such as laundry, skin care and oral care, we expect it to continue investing in these categories. We expect it to report revenue and earnings CAGRs of just 10% and 5%, respectively.

We believe that, at current levels, any stock price upside has already been capped. Risks: Lower raw material prices & lower than expected competitive pressure


Motilal Oswal Research

HUL has underlined a four-pronged approach to step up performance: a) Innovation with focus on bigger and better ideas by leveraging new technologies, including digital. b) Exploiting new growth opportunities by capturing new frontiers (Africa), faster growing channels and premiumization. c) Driving agility and simplification by leveraging Unilever’s scale to drive cost efficiencies in the value chain. d) More Fuel for growth through portfolio simplification (disposal of non-core brands/sku’s), cost cutting initiatives (Project Half led to Euro500m savings).

While HUVR’s performance remained competitive in the backdrop of challenging macro environment, we believe current valuation at 35x FY15E and 31.6x FY16E EPS are rich and adequately capture the positives. Revival of Fair & Lovely is a key factor to watch for as it holds disproportionate influence on Personal Products margins, in our view.

We maintain a Sell with a target price of Rs 600 (30x FY16E EPS). Better-than-expected pickup in volume growth is a key upside risk, while spike in input cost, on deficient monsoon, poses margin risk.