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Jul 26, 2013, 03.49 PM IST | Source: CNBC-TV18

HUL may fall 15-20%; RBI unlikely to ease in a hurry: Kotak

According to Sanjeev Prasad of Kotak Institutional Equities HUL was a `sell' for most people until Unilever came out with Open Offer. Valuations ran amok since then.

Sanjeev Prasad of Kotak Institutional Equities expressed dismay at the bizarre valuations of top FMCG stock Hindustan Unilever (HUL) and expects it to correct 15-20 percent.  There is no point owning this stock at current levels, he says.  According to him most investors had a sell on HUL until it came out with the open offer.  From then on the stock zoomed and the valuations now belie any justifications, he said adding there is not much to recommend in these market. 

Below is the verbatim transcript of Sanjeev Prasad’s interview on CNBC-TV18

Q: Lot of the discussion this morning has hinged around Fast Moving Consumer Goods (FMCG). What do you do with Hindustan Unilever (HUL) now at these kind of valuations running into its results?

A: Sell it. It is trading at rather bizarre valuations, 40 times on 2015 numbers, low 30s on 2017 earnings, so I do not know how you are going to make money on this stock. It is going to correct maybe about 15-20 percent and then we can start looking at it, but at these valuations honestly owning any FMCG stock is asking for disaster. Either you are not going to make money for a few years or you are going to have a severe price correction over here. So there is no point owning these stocks at current levels.

Q: Many of your brokerage community friends do not seem to agree. Every dip is considered an opportunity to buy. The valuation outlook for Hindustan Unilever (HUL) is justified at any level. What is going on over there?

A: It is up to them to justify the valuations. What is happening these days is you do not have much to recommend anyway in the market, so if the top stocks in the sectors that are doing very well, that automatically becomes a benchmark for just about every other stock in the sector and the classic case is HUL, about Rs 450-500 before the transaction got announced, most people had probably a sell or a reduce or whatever. It was pretty fairly valued then.

Then suddenly HUL comes with an open offer at Rs 600, then Rs 600 becomes a benchmark, then because of the short squeeze it goes to Rs 700, which then becomes a benchmark for the stock. Obviously the valuations have got inflated by about 50 percent between Rs 450 and Rs 700 and on that basis everything else gets rerated by 50 percent.

That is what is happening in the market. That is pretty much a joke the kind of argument made out by the market in terms of relative valuations. The company is great, but the kind of valuations and the arguments being made to justify the valuations does not make any sense.

Q: The big problem over the last one month has been the banks with reference to what the Reserve Bank of India (RBI) has also done of late. What do you do with that space now and how have you read the measures from RBI?

A: We have been pretty underweight on the banking sector for sometime. Most of our concerns stem from the Non-Performing Loan (NPL) side and I honestly do not think we have seen the worst of it. In fact NPL problem is going to be far bigger than what the market expects it to be. Many of the larger companies are in serious trouble and they are alive primarily because they have been kept alive by the banking system. As far as the economic recovery goes it is not happening for sometime, so I am pretty confident that a lot of these companies will eventually get restructured or classified as NPLs as the case maybe. So that was our primary source of concern.

The other area which has emerged of late is India should have prepared for much higher interest rates. All these measures which the market is expecting is going to be temporary from the RBI's side. I do not think you are going to see the RBI tapering this off in a big hurry. Do keep in mind the fact that India is running a structurally large Current Account Deficit (CAD), it requires large amount of capital flows to come in and actually needs to prevent capital flows from going out.

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