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Brokerages downgrade HUL on price war

Viveat Susan Pinto  |  Mumbai 

A majority of brokerage firms have downgraded their view on Hindustan Unilever (HUL) following its price war with Procter & Gamble (P&G) in detergents.

Last week, P&G had reduced the price of Tide Naturals indirectly, by increasing grammage of the product. The increase was 25 per cent across stock-keeping units (SKUs) of the brand. This meant a 200g pack of Tide Naturals would now have 50g extra for the same Rs 10; a 400g pack of Tide Naturals would have 100g extra at the same Rs 20.

The HUL stock then took a hit. It fell by 8.75 per cent over March 11 and 12, to close at Rs 219.60 at the end of the week. It regained some lost ground, touching Rs 228.55 at the end of the week. But, this is yet to cheer analysts tracking the company.

Brokerage firms Rating (earlier) Rating (current) (date)
Anand Rathi Sell Sell (March 16)
HSBC Overweight Neutral (March 18)
Angel Buy Neutral (March 12)
RBS Hold Buy (March 18)
Source: Analyst reports

“We have been downgrading HUL since the last one year. I find most brokerage houses are taking our view now,” says Shirish Pardeshi, senior analyst at Anand Rathi Securities.

“Price competition has been more aggressive than we initially anticipated. We estimate this could render the detergents business, which we estimate accounts for 10-12 per cent of the company’s earnings before income tax, unprofitable, and result in flat earnings per share growth in FY11 (estimate). We believe we could see more price cuts before the situation stabilises – the price ladder in detergents has moved downwards, putting pressure on discount brands such as Wheel to cut prices further,” states Percy Panthaki, analyst at HSBC Securities in his report on HUL dated March 18.

The consensus among most brokerage firms is that a repeat of 2004 is in the offing, as the HUL-P&G war intensifies this year.

Anand Shah, senior research analyst at Angel Securities, said in his report dated March 12: “It was in March 2004 that P&G initiated the detergent war when it slashed the price of its Tide and Ariel brands by 20 to 50 per cent, respectively. This followed the success of its 50 per cent price-cut in sachets of the same brands in 2003. HUL was forced to react, slashing the price of Surf Excel to match Ariel. The price of Surf Blue was also slashed. But it was still higher than Tide. The price war soon spilled into other categories such as shampoos.”

Pardeshi of Anand Rathi concurs that the current price-war would not be restricted to detergents. “Our view is thar it will spread to categories such as personal care.”

Already, he added, HUL has upped the ante in the soaps segment by signing Katrina Kaif as brand ambassador for its new variant of Lux, ads of which are on air at the moment. “She was endorsing the Dyna soap brand from Anchor. Now she is doing Lux,” he says.

There are some brokerage firms, however, that hold a contrarian view on HUL. An RBS report dated March 18 says, “We have been cautious on HUL since May 2009, expecting margin pressure as the company attempted to revive market share and volume growth. In the last year, the stock underperformed the Sensex by 51 per cent. We expect no broad margin erosion as in 2004. Our checks suggest rising market share and volume growth. Buy.”

First Published: Sat, March 20 2010. 00:41 IST