HUL weak post Q2: Why are analysts still positive on it?

Macquaire is positive on HUL's medium term growth potential but believes rich valuations will limit the upside in near term. It has a 12-month target of Rs 700 as higher sales volumes growth and improvement in demand scenario may drive the stock.

October 29, 2014 / 10:53 AM IST
 
 
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Though HUL shares suffered a knee-jerk reaction (fell 5 percent on Monday) just after it announced its July-September quarter, analysts are not negative on it yet. The stock lost 2 percent intraday on Tuesday.


Maintaining neutral rating Credit Suisse says HUL's EBITDA margin expanded 50 basis points (bps) year-on-year despite a sharp 160 bps fall in gross margins, as advertising spend came down due to competitive intensity being benign. "The fall in gross margins was unexpected and was driven by a low base for raw material costs and higher excise duty. With softening commodity prices now only starting to kick in, we expect gross margins to start improving from Q3," it said in a note.


Credit Suisse thinks FMCG sector is in a sweet spot with an improving growth outlook, easing inputs and benign competitive intensity and hence HUL's personal care business should benefit from all these, valuations leave little room for upside.


Macquaire is positive on HUL's medium term growth potential but believes rich valuations will limit the upside in near term. It has a 12-month target of Rs 700 hoping higher sales volumes growth and improvement in demand scenario to drive the stock.

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CIMB also agrees that though HUL is better positioned to capture a demand recovery versus its peers given its superior execution and premium product portfolio, there will be a better entry point given its current rich valuations.


Goldman Sachs' target price on the stock remains unchanged at Rs 604 per share."We adjust our estimates for higher operating and adverstising and promotions expenses, offset by higher other income due to high cash balances with the company. Faster-than-expected volume growth is its upside while increased competitive pressure and high input raw material inflation may pose as a potential risk.


However, CLSA recommends selling the stock as HUL’s volume growth was lacklustre and gross margins decline was much higher than its expectations. "HUL should benefit from lower input prices but earnings growth would be modest at 12 percent CAGR impacted by a higher excise duties and an increase in income tax rates," it said in a note.


The FMCG major's net profit rose 8.1 percent year-on-year to Rs 988 crore supported by exceptional gain and higher revenue growth. Total income from operations grew by 10.8 percent to Rs 7,639 crore from Rs 6,892.6 crore during the same period.


At 10:33 hrs the stock was quoting at Rs 713.95, down Rs 7.95, or 1.10 percent on the BSE.

Posted by Nasrin Sultana
 

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