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Jan 23, 2013, 10.44 PM IST | Source: Moneycontrol.com

HUL dips on poor Q3, new royalty pact; brokers cut rating

Hindustan Unilever shares extended losses and tumbled 5 percent in morning trade on Wednesday after several brokerages cut their rating on the stock following disappointing third quarter earnings and a new pact with its Anglo-Dutch parent Unilever Plc, which will see its royalty payments more than double over next few years.

Moneycontrol Bureau

Hindustan Unilever shares extended losses and tumbled 5 percent in morning trade on Wednesday after several brokerages cut their rating on the stock following disappointing third quarter earnings and a new pact with its Anglo-Dutch parent Unilever Plc, which will see its royalty payments more than double over next few years.

HUL on Tuesday reported a lower-than-expected 16 percent year-on-year rise in third quarter net profit at Rs 871 crore.

Net sales of the largest FMCG company in India rose 12 percent year-on-year to Rs 6,655 crore in Oct-Dec.

What's surprising is that volume growth came in at just 5 percent, compared with 9 percent a year ago and analysts expectation of at least 7 percent. CFO R Sridhar said that there was a slowdown in discretionary spends by customers, which had hurt sales.

In comparision, ITC had reported third quarter results ahead of street expectations. Contrary to HUL, ITC saw strong sales growth in its non-cigarettes FMCG business, and losses in that segment also reduced further.

HUL has also announced a new royalty agreement with Unilever, as per which, the royalty that it pays will increase to 3.15 percent of turnover by March 2018, compared with 1.4 percent now.

CLSA cut its rating on HUL to "sell" from "outperform," Nomura downgraded it to "reduce" from "neutral" and Credit Suisse cut its rating to "neutral."

"The increase in FY14 (royalty payment) alone is 50bps, and the rate will keep increasing progressively over the next few years. HUL's tax rate is also moving higher over the next couple of years, which will impact profit growth," said Nomura analysts Manish Jain and Anup Sudhendranath.

The analysts cut their earnings estimates for FY2013-15 by 5-12 percent and said valuation multiples are likely to correct over next few months given HUL's slowest earnings growth in their coverage universe.

"Over the next few quarters, volume growth is likely to remain subdued, in our view, while advertising and promotion spend is likely to keep increasing. This will lead to further pressure on profitability, which we believe will drive down valuation multiples," Jain and Sudhendranath said.

Also Read: Analysts maintain 'buy' as ITC beats street in Q3

"HUL has delivered a disappointing set of numbers for Q3. 5 percent underlying volume growth for domestic consumer business is the lowest in the last three years...We expect the increase in royalty to have an impact of 0.50 paise a share on FY2014 earnings per share," Angel Broking said, maintaining a "neutural" rating on the stock.

Here are some more brokerage views on HUL:

BRICS: HUL's Q3 results were not very encouraging. Moreover, we see more headwinds than catalysts for future growth. We believe that the headwinds related to - escalating competition, unfavourable base and firm commodity prices - will act as hurdles to future growth. Cut FY13 and FY14 earnings estimates to Rs 15.1 and Rs 16 from Rs 15.3 and and Rs 17.1. Rating: Reduce.

CITIGROUP: Our EBITDA forecasts for FY14-15 have been cut by 3 percent / 7 percent respectively, reflecting the cascading impact of royalties. Earnings impact is more muted (2-3 percent) as assumptions for income from services rendered have been hiked substantially. We now are forecasting a relatively modest 13 percent earnings growth over FY12-15. Rating: Sell.

KARVY: On the back of rise in royalty payment (taking 50 bps in FY14 and assuming 30 bps rise in FY15) and slower discretionary demand we reduce our FY14 and FY15 EPS by 6 percent and 10 percent respectively. On the back of slower sales growth and change in EBITDA margin profile, we also change our P/E to 28 times (previous 30 times) on 24-month forward earnings. Rating: Downgrade to Sell from Hold.

HUL shares, which closed up over 3 percent on Tuesday, fell over 6 percent in morning trade on Wednesday. At 14:00 hrs, the stock was still down 4.7 percent at Rs 458.20 on NSE.

Nachiket Kelkar
nachiket.kelkar@network18online.com

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