Why is IDFC Sec bullish on HUL?

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Why is IDFC Sec bullish on HUL?

However, Nikhil Vora, MD, IDFC Securities is optimistic on HUL. According to him the double-digit volume growth is strong point for the company. In an interview to CNBC-TV18, Vora said that going forward calibrated price hike is expected on FMCG products.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets

It has been a rough three-month for FMCG giant Hindustan Unilever (HUL). It came out with a disappointing set of third quarter numbers. Despite a 12% growth in revenues, net profit fell nearly 2% to Rs 638 crore. The company blames this on rising input costs.

However, Nikhil Vora, MD, IDFC Securities is optimistic on HUL. According to him the double-digit volume growth is strong point for the company. In an interview to CNBC-TV18, Vora said that going forward calibrated price hike is expected on FMCG products.

He sees HUL to maintain volume growth in upcoming quarters.

Below is a verbatim transcript of Nikhil Vora's interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos for more.

Q: You had an overweight on Lever what did you make of this quarters numbers?

A: We just changed our multi year bearish view on Lever and upgraded the stock just 15 days back. If I look at the broad track of the way the business has shaped up, I am still extremely optimistic about the way the entire map up has been. You are starting to look at a volume growth story which remains in strong double-digits which means that protection of market share and growth of market share is starting to happen in Lever.

Secondly, as you look at consumer business, you have got to take a longish call on those businesses. You look at more consumers and new consumers coming to that space which means that your existing product profile is fairly robust as well as you are building in new product profiles for the new consumers.

The margins that you have seen and the disruption that you have seen, eventually, you do not look at a business which has more than 40% of its revenues coming from a category which is working at sub optimal margins which is soaps and detergents. The margin profile of soaps and detergents is less than 8% which is lower than even contract manufacturer margin in that category.

It is just inconceivable that in a mature category like soaps and detergents, consumer business can live and survive with such low margins. The margins of the portfolio have to shape up over a period of time. The irony is that whether it does happen in a quarter or two or it takes a slightly longer-term period than that.

Our call is that as long as the volume growth story remains insulated, we are perfectly home, playing a lower margin business. As long as the business robustness which is displayed by market share, steadiness and gains in new categories, remains unabated. I remain bullish on Lever. The stock has come off. I feel that players who are willing to play out for a longer period directionally, things have not changed a bit.

Q: Do you worry that though given Lever's current focus now on maintaining market share, it may be reluctant to pass down price increases or raw material price increases and therefore, the margin weakness might linger longer than you expect it to?

A: Perfectly. Unlike in the historic past when Lever was more margin obsessed, the new Lever that one sees today is possibly more volume focused and that to me is directionally a positive statement to make.

Secondly, the volatility in raw material or input cost which includes crude, earlier the volatility used to be sharp, thereby; the price increases were not as calibrated as you are looking at the scenario now. You are looking at an input cost scenario which is on a steady up climb.

My sense is that price increases will get calibrated and start to increase as we move forward. To that extent, there is a fair bit of consumer interface which Lever has started to look at and address it in a more practical and sustained manner. A calibrated price increase in consumer businesses is the way forward rather than becoming too knee jerk and responding to price corrections or prices increases in input cost.

While you may have to live with a slightly longer-term tenure of subdued margin profile but longer-term, the robustness of the business will come through and that is really going to be dictated by the number of consumers who really walk into your product profile at every point in time. As long as volume growth is at 12-13%, you are extremely comfortable playing the stock.

Q: For the near-term are you scaling back your Rs 9.6 this year and Rs 11.7 next year EPS target because of these margin issues you spoke about?

A: There is around 4-5% scale down which is happening for FY12. The Rs 11.7 number that we have is likely to get scaled down to that extent. The choice is to whether one has to buy the stock at 24 times earnings or 22 times earnings.

The choice is to buy whether you have visibility of those businesses on a sustained basis and I do not see any change in that stance. Sustenance is there. The valuation could have been in hindsight, possibly, a better attractive value as an entry point could have been found out. If you are willing to play out a couple of years call on Lever you are perfectly home.