HUL FY16 volume growth unlikely to exceed 6-7%: CIMB

Sonia: The stock reacted to the numbers, was up three and a half percent on Friday, how much more would you give it based on these earnings?

A: Numbers were a tad better than estimates on topline but you have to also keep in mind the base which was quite favorable in this quarter both for volume growth and for personal product so adjusting for base and one-off excise refund, numbers were in line which is okay in this environment on a relative basis but on absolute basis we believe valuations are pretty full so we have maintained our reduced rating on the stock with a target price of Rs 750, so we don’t see much upside from current levels.

Latha: You don't expect any improvement because of say raw material prices or what one brokerage has called a premiumisation trend, no gains in margins or realizations to be eked out?

A: We are building in a fairly decent margin expansion even in FY16 and FY17 so if you look at over the next two years we are building in almost a 150 bps margin expansion which is pretty considerable given the fact that they have already improved their earnings before interest, taxes, depreciation, and amortization (EBITDA) margins by around 300 bps in last three years and on the premiumisation bit, yes most of their premium brands are doing better than their mass-end brands which helps in terms of overall realization growth and profit growth but we believe that is more or less in numbers, so what we are building in is that top line growth will be around 11-12 percent in FY16 which itself is a decent improvement compared to current levels. So it is on back of some improvement in volume growth, some improvement in realizations going forward.

Sonia: What could that improvement in volume growth be because the management also on the call stated that it is too early to gauge the impact of unseasonal rains on rural demand and we have seen it across the board that there has not been too much of an impact on rural demand that was visible this quarter but next quarter on wards what kind of volume growth are you forecasting?

A: Our view is that first half of FY16 it will be difficult for them to sustain even the current top line trajectory and overall for full year we believe volume growth is unlikely to be above 6-7 percent. So our view on overall macro consumption trends remain negative which is why we have a sell on most of the consumer staples because we believe that recovery would be fairly delayed which is again something which management also confirmed on the call that there is no trend as of now of overall recovery in either urban or rural and on rural they also highlighted that probably that risk are a bit to the down side, they need to see how the monsoon goes and all. So on topline clearly volume growth and to expect anything above six to seven percent would be difficult in FY16 which is what we are building in and six percent in this quarter you have to look against the base of three percent so on a normalized basis the company has been in that four to five percent volume growth band for almost six quarters now.

Latha: Well now that we have you with us, let me just extend this argument. Titan, gory numbers one thought from such a marquee company. Sell?

A: Titan numbers were clearly disappointing for Q4 but you have to look at it in the back drop of the fact that golden harvest scheme is not there this quarter, so numbers were expected to be weak on jewellery but they were a bit more on the softer side compared to what we had estimates. In terms of valuations it is starting to look a bit reasonable but still not attractive enough for a buy, so we have a hold rating on the stock which we have maintained. We believe numbers will start to look better from second half when the base gets favorable and the golden harvest scheme impact comes in the base but first half again is not expected to be anything significant but it will be definitely better than this quarter and we tend to agree with the steps that management has taken.

Latha: Is there any buy for you at all in the space that you look at? Kansai Nerolac numbers were looking okay over the weekend, anything at all that is a buy?

A: Overall in terms of our ratings, it is only ITC amongst the staples where we have a higher rating which is effectively a buy rating which again post the current fall, we believe risk-reward has become fairly attractive on ITC. So, ITC is a buy and Jubilant Food Works we have a buy on, so apart from these two, most of the other names are either hold or sell.

Sonia: Not even a buy on Dabur which had a very good set of numbers this quarter?

A: Dabur again we had downgraded few quarters back and Marico again we had a buy till now but we had recently downgraded Marico after this quarter. So, our sell rating on most of the staples is on the back of the view that the recovery in consumption won’t be fast enough, margin expansion has already built in, so on a relative basis, yes a Dabur, Unilever, they are executing well so if one were to pick some stocks, probably they are in the top half I would say from execution point of view but absolute valuations look stretched all across the board.