Though investors are busy offloading HUL shares after a disappointing June quarter, few analysts still find potential in the FMCG major. HUL's net profit rose 9.8 percent at Rs 1174 crore in April-June quarter from Rs 1069.2 crore in year-ago period. In Q1, its total income was below expectations, up 3.6 percent at Rs 8128.2 crore compared to Rs 7844.5 crore year-on-year. Its volume growth in Q1 was at 4 percent from 6 percent on annual basis but unchanged on sequential basis. Ad-spends for the quarter contracted by 60 basis points (bps). While slowdown has been across markets, the rural demand has been weaker.
So, why are analysts bullish?
Macquarie has an outperform rating with a target of Rs 940 per share betting on higher sales volumes growth and improvement in demand scenario. The brokerage is positive as the management expects normal monsoons and 7th pay commission payouts may revive demand growth over medium term. HUL management has reaffirmed their guidance of continued improvement in operating margins despite the recent increase in commodity costs.
With a view that goods and service tax (GST) will be a key trigger for HUL, Credit Suisse has an outperform rating. It has set a target price of Rs 930 per share. The brokerage firm believes that if GST standard rate is 18-20 percent, it could be a positive for HUL and can lower the indirect tax rate by 300-500 basis points for HUL. GST is likely to be passed in the ongoing monsoon session of Parliament. HUL hiked prices of soaps in few months and the brokerage firm expects deflation in soaps to end in Q2FY17.
Credit Suisse also adds that after HUL opens a new factory in Assam with an investment of Rs 1000 crore it will have an excise exemption for 10 years and income tax exemptions. The facility is likely to be ready by early 2017, in which case HUL's excise and income tax rate could gradually go down as production ramps up. However, there are concerns about its rural slowdown especially like Maharashtra, AP and Karnataka, which are also the severely drought effected areas. "While the good monsoons this year should help improve the trend, this may take a couple of quarters to play out," it says in a report.
Bank of America Merill Lynch also has a buy rating with a target price of Rs 1020 per share. It is betting on monsoon, GST and 7th Pay Commission to boost the stock. It says a likely normal monsoon with 45 percent of the company’srevenue from rural markets, HUL will be a key beneficiary if the GST is implemented, disbursement of the 7th Pay Commission-linked wage hikes could help urban demand/personal care and a possible buyback/special dividend will drive it. It also adds that a strong 18 percent earnings per share (EPS) CAGR is likely to support a premium valuation.
Morgan Stanley has an overweight rating with a target of Rs 945 per share, positive on high visibility of strong operating margin expansion even in a likely inflationary environment. Dabur is the only other consumer stable stock that the house has an overweight rating.
"If we were to adjust for a one-time credit of Rs 48 crore for employee costs in Q1F16, operating margins expanded by 150bps YoY. This, in our view, was the keypositive for the quarter," it says in a report. However, it is worried about rural demand. Morgan Stanley does not expect a material recovery in rural demand for the next 2-3 quarters and there may be a risk of trends moderating further. The management indicated that premium brands, large packs and modern trade are performing better than economy brands, low unit packs and general trade, respectively.
Deutsche Bank has a hold rating with a target of Rs 900 per share and the feels that the cautious rural outlook is not surprising. It expects 15.3 percent earnings CAGR in FY16-18 and believes consumption recovery is adequately priced in. It agress that new factory in Assam is likely to provide upside to consensus estimates for FY18-22.
The brokerage firm says that Q1 performance reflects the struggle – low price growth has a flow-through effect on profit growth at a time of low volume growth. It disagrees that HUL is at the beginning of inflation-led revenue growth in FY2017. "Some commodities likesuch as palm oil have risen 9 percent/ 50 percent in the past three/sixmonths, inflation in inputs in general is unclear. Given the likelyfeeble rural consumption recovery, we see a lag between cost inflation and price increases as HUL focuses on volume growth. We expect HUL to moderate adspends in FY2017E to manage EBITDA margins, as competitive intensity is low," it says in a report.
Meanwhile, Goldman Sachs has a neutral rating with a slashed target of Rs 664 per share. It has also cut our FY17-19 EBIT by 1-6 percent to reflect slower volume growth but cut EPS estimates by only 1-4 percent, to factor in tax benefits. It is concerned about a premiumisation-led strategy in an environment with high competitive intensity and limited affordability for urban mass consumers.
Its personal care growth was impacted in Q1 by price deflation in soaps and weak growth for oral care. Home care growth was led by shift towards premium detergents, partly led by lower price premium and partly by a better uptake for machine detergents. However, CLSA has an underperform rating with a target of Rs 885 per share. It says that the change over to IndAS did impact several line items in the income statement but the key change was in segmental reporting (soaps moved to personal care now). Q1 growth was volume-led while realisations wereflat on annual basis.Suggesting to sell HUL, Citi states that growth is elusive. However, it feels that personal-wash category deflation should ease over the next one-two quarters and cost saving programmes on inputs continue to drive margin expansion.
IDFC has an underperfom rating with a target price of Rs 809 per share. It is cautious that further weakness in market demand comes as a negative for the industry as a whole and has resulted in HUL not being able to better itsvolume growth performance of Q4FY16.
The brokerage firm says that HUL's overall size and rural mix restricts it from significantly outperforming the market in spite of the company continuing to execute its strategy of being innovative, premium and competitive effectively on ground. Given volume growth challenges, IDFC has reduced FY17 volume growth assumption to 6 percent from 7 percent "However assuming an external factors led recovery, we assume a 8 percent volume growth for FY18 and improvingprofitability for HUL," it says in a report.
The stock fell 3 percent intrady on Tuesday. At 10:10 hrs it was quoting at Rs 901.50, down Rs 18.95, or 2.06 percent on the BSE.Follow @NasrinzStory
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