Fundamentals don't warrant HUL, Nestle jump: ICICI Direct

FMCG majors Hindustan Unilever (HUL) and Nestle are currently trading at 40 times two year forward multiples, these stocks are expensive and valuations are not justified, believes Sanjay Manyal of ICICI Direct.

Hindustan Unilever (HUL) hit an all-time high of Rs 698.95 on Wednesday on MSCI and FTSE rebalancing. The float of the stock will go up to 33 percent from 24 percent in FTSE All-World Index and All Emerging Index with effect from July 22. “Large investors want do hold HUL because of rebalancing. Some also expect it to delist in the next two-three years. So, that can be technical reasons why the stock is performing so well, but fundamentals are not comfortable at this point in time,” he elaborated. Below is the edited transcript of Sanjay Manyal’s interview with CNBC-TV18 Q: This is gravity defying performance of Hindustan Unilever (HUL) stock but it has excellent company in the fast moving consumer goods (FMCG) space, if it is trading 41 times, there are other stocks trading 45 times in comparison with Nestle India and other stocks which are owned largely by the parent. Do you think HUL is still good for more or is it at profit taking juncture? A: There is no doubt that HUL is trading at all time highs and is one of the most expensive stocks in the FMCG index now along with Nestle. Despite that, there are very few options in the market and investors want to stay with defensives. Still, I would say they are expensive and valuations are not justified. Both the stocks are trading at 40 times two year forward multiples, which is more certainly expensive. Though we had a hold rating on the stock, but post the results we will be reviving our numbers. These stocks are going to an uncomfortable zone now. Q: That is established, how high the valuations are for Hindustan Unilever Limited but purely on a technical basis after the open offer got done it seems like most of the sellers are out of the market now and the holding in the stock has thinned considerably. We do have that FTSE rebalancing that comes into effect tomorrow as well. Just purely on a technical basis do you think there is more upside to the stock? A: That is what is happening right now. Either it is a free float which has come down to almost 30 percent or most large investors want do hold it because of rebalancing in some global indices. It can also be that a lot of investors want to hold it because they expect delisting to happen in the next two-three years. So, that is one technical reason is why the stock is performing so well, but fundamentals are not comfortable at this point in time. Q: Is it a tactical buy and becomes a tactical sell after the event plays out? A: It could be a tactical buy for a few days, but once the event is over people will get back to the numbers which will be out next week. There has been visible slowdown in the demand pattern. If one takes any company in the consumer space – even HUL last year used to do 10 percent plus kind of volume growth which has come down to 5 percent. Simultaneously, with expensive multiples and slowdown these valuations are not justified. Q: Since the valuations are so expensive in some of these heavyweight stocks do you recommend buying into any of these broader market fast moving consumer good stocks that are actually trading at higher valuations but perhaps could offer more attractive opportunities now. Dabur has hit a new high today any thoughts there? A: We had a buy on Dabur and Marico, but the stocks have run up a lot. We had a buy on these stocks just purely on the valuation gap between the largecap and midcaps. Dabur for that matter is trading 28-29 times of forward multiples. People who wanted to stick to defensives - one should still choose stocks which are comfortable at valuation multiples and Dabur was recommended by us earlier. Now it is almost touching Rs 170 odd plus, so it is going to a zone where valuation will become expensive. Q: The market has rewarded very few stocks and a large bunch of them are performing badly, perhaps the biggest reason why we are seeing these fancy multiples for FMCG stocks is also because the big sector in the index, the bankex is getting thrashed up and does not look like recovering anytime soon. For equity fund managers who have an assets under management (AUM) to manage and who have to perform don’t you think that these kinds of stocks might remain elevated for longer than their multiples justify? A: One may not see a kind sell-off one has seen in other sectors. As far as fresh buying is concerned, I would still be very uncomfortable buying these stocks at these multiples. Fund managers and investors who would want to hold on to the stock when there is so much of uncertainty in the market in other sectors are not doing well – most of the other sectors are laggards at this point in time and just because of that point fund managers would like to hold on to most of the FMCG stocks even at such multiples.