See 20% upside in HUL in one-year: StanChart Securities

Sanjay Singh, associate director of Standard Chartered Securities India says, HUL’s Q3 performance was ahead of the expectations.

According to him, the stock correction was due to build up before Q3 numbers. He sees HUL consolidating in the near-term and 20% upside in one-year. "Our target price is Rs 457 from a one-year perspective," he adds. 

Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: What would the market have disliked most about the Hindustan Unilever numbers?

A: I think the numbers were not bad numbers. They were much ahead of expectations. It is just that the build-up prior to the results in the stock was very strong; there was almost a 6-7% build-up prior to results.

If you see the volume growth, it was very strong at 9.1%. I think there was a little disappointment because people were expecting a double digit volume growth. There was some commentary from Unilever Global that volume growth in India has been in double digits.

As far as we are concerned, the numbers were much ahead of the street as well as us. Volume growth was higher. Margins were higher. Soaps and detergents margin was significantly high. Overall, profit after tax (PAT) growth at around 30% plus to around USD 7.6 billion or Rs 760 crore was higher than the Rs 700 crore estimate with the street.

I think it is more of the scarcity premium which was there earlier coming down a bit because the overall run up in the market. I don’t think anything was wrong in the results. The only disappointment was the personal product margins which was a little lower. But apart from that, I don’t see any disappointment in the numbers.

Q: Some of your peers have suggested that perhaps Lever has a bit of an uphill task in terms of its margin profile from hereon. They have had to slash their advertising and promotional expenses as opposed to what their smaller peers have done. Would you say that Lever is probably in a tight spot in terms of margins because they have already done a whole series of price hikes through the course of this year?

A: I think the price hikes has been a continuous process. There has been some price hikes even in December and January as we speak.

The advertising and promotion (A&P) is not a stagnant figure. It is a dynamic figure which changes as per the market conditions. The A&P being low currently compared to say what it was a year back or few quarters back is a function of what the other competitors are doing.

I think the key factor to look here is that share of voice. As per our discussions with the management and our understanding, share of voice across categories has been pretty much stable. So, the lower A&P spend is a function of lower spends by competitors because of very low gross margins in soaps and detergents from historical levels and also because of media inflation is not as high as it was, maybe a year back, given the larger economic scenario.

I think A&P margins going down is not much to worry about. The more important number to see is share of voice, which to my understanding is very healthy.

Q: Given where the stock is trading at, at this point, what is it that you are comfortable with in terms of a price target and earnings potential for Lever?

A: The stock has been the best performer last year and has outperformed both FMCG index and the Sensex by a wide margin. So, there has to be some consolidation in the stock at around these levels. Having said that, we still see a 20% kind of upside from one-year perspective.

We have just raised our earnings after yesterday’s results by around 2% for FY13 and 14. Our target price is Rs 457 from a one-year perspective. We expect a 20% earnings growth from FY12 to FY14 CAGR. That we think is pretty much healthy.