Brokerages give HUL thumbs down on negative feedback

Post recent interactions with the Hindustan Unilever (HUL) management and shop-floor sources, brokerages have turned bearish on the FMCG giant. Some are even advising investors to exit through the ongoing open offer in which Anglo-Dutch parent, Unilever, is upping it's stake in its Indian arm to 75%, reports CNBC-TV18’s Farah Bookwala.

Also read: Big mkt recovery unlikely; sell HUL: JRG Sec

While on one hand, parent Unilever is betting big on HUL by raising its stake from 52.48 percent to 75 percent through an ongoing USD 5.4 billion open offer, on the other hand  brokerages are raising a caution flag on the Indian FMCG giant's long-term story. While IDFC is 'neutral' on the stock, Nomura maintains its 'reduce' rating, even as CLSA has initiated a 'sell' rating on the stock. The key concern is the sharp fall in volume growth over the past 13 quarters from peaks of 14 percent in March 2011 to 6 percent in March 2013, which brokerages worry will further decelerate. Consequently, IDFC has factored in only a 4 percent volume growth in Q1 FY ‘14, even as Nomura estimates volume growth for the entire year at 6-7 percent. Brokerages have also sounded an alarm on early signs of down-trading. IDFC says, “The consistent uptrading and premiumisation that aided growth and mix have slowed. For the first time in several quarters, the mass end of the spectrum is growing at a faster pace, pointing to early sings of down-trading. The consistent uptrading and premiumisation that aided growth and mix have slowed. For the first time in several quarters, the mass end of the spectrum is growing at a faster pace, pointing to early sings of down-trading. The changed trend is visible across categories.” The depreciating rupee has added to the trouble as 45 percent of HUL’s raw material basket is either directly imported or import-parity linked so the company's margins are likely to be under pressure till the company can hike prices to cover for higher costs. Margins are also likely to suffer as ad-spends rise due to stronger competive intensity. Given all these pressures, including others such as higher taxes, royalty payment and dividend payouts, competition from regional players and the lack of a strong innovation funnel, Nomura and IDFC are urging investors to exit via the open offer. At its end, CLSA says the spot price is far more attractive based on predictions of future stock performance and therefore recommends selling at current levels. All of this emerging after the brokerages held interactions with the management and analsysts say, in the absence of any clear guidelines that prevent the company to speak during an ongoing public offering, Sebi might be prompted to come out with one.