No change in HUL fundamentals, bullish on ITC: Antique

In an interview on CNBC-TV18, Abhijeet Kundu, FMCG analyst, Antique Broking, said despite the fact that HUL is at Rs 705, up 3 percent, the fundamentals of the company has not changed since the last two quarters. He says price hikes per se for HUL will be difficult during FY14 and may be in FY15 as well. There could be pressure coming in from higher ad spends. "Going ahead, earnings growth would relatively be lower as compared to FY13. So the scenario overall remains very challenging not only for HUL but for the sector as a whole," Kundu said.

He further added, "One of the reasons the market has been attributing to the spike in HUL's price has been the rebalancing of FTSE, hence there has been a spike." Also Read: Earnings downgrades to get nastier; cautious on HUL: IIFL
Kundu said he is positive on ITC. He says the company has the strongest pricing power in the sector. The company has always been able to pass on the excise duty increases and despite all the duty increases the company has been able to accelerate its cigarette earning growth. ITC has also achieved profitability in other FMCG, which goes according to their plan. "In case of ITC a 16-18 percent growth is something which could be easily achieved because competition is very low in their most profitable category which is not the case with other companies," Kundu said. Below is the verbatim transcript of Abhijeet Kundu's interview on CNBC-TV18 Q: What is going on with Hindustan Unilever (HUL), it is at Rs 705 as we speak, up another 3 percent. What reasons would you attribute to this phenomenal spike over the last 48 hours?
A: In terms of fundamentals nothing really has changed from what it has been since the last two quarters. If you look at the pressure on earnings growth going ahead that story remains intact. In the sense on a high base year of last year to replicate a volume growth would be a herculean task which would not really happen. At the same time you also have pressure on realisation growth. So price hikes per se for HUL will also be quite difficult during FY14 and may be in FY15 as well.
At the same time what you are seeing is there could be pressure coming in from higher ad spends. With competition briefing up and demand growth in the FMCG sector as a whole we are seeing a slowdown. So you would see increase in expenses and slowdown in sales growth. So going ahead the earnings growth would relatively be lower as compared to FY13. So the scenario overall remains very challenging not only for HUL but for the sector as a whole.
In such a scenario if you look at the valuation at the current level at about Rs 705, it is close to about 37-38 times FY15 which it is pretty richly valued. One of the reasons the market has been attributing to the spike in HUL’s price has been the rebalancing of FTSE hence there has been a spike. That is what has been the attribution. However, according to me nothing really has changed fundamentally. Q: Are you picking up anything more about this technical situation, the FTSE rebalancing because your observation seems to be that post the open offer stock availability or holding also thinned quite a bit. And that is causing such acute spikes in that stock through this rebalancing period?
A: That is one of the reasons because the overall float comes off and there has been a rebalancing in case of FTSE which has created a higher demand for the stock. So I believe this could be more of a short-term phenomenon because ultimately it is very difficult to take a call in the short-term. However when we look at the fundamental scenario the way things are expected to pan out is pretty challenging for the FMCG company environment as a whole. So in such a scenario, such valuations I don't know till what extent it will sustain. According to me it is very difficult to sustain. Q: What about ITC at Rs 370, do you see growth, which has been good for the last few quarters, being good enough to sustain valuations of 33-34 times?
A: Frankly I am more positive on ITC. Within the sector I see that ITC has the strongest pricing power in the sector. Certainly on the earnings growth of ITC is the highest within the sector. Company has always been able to pass on the excise duty increases and despite all the duty increases the company has been able to accelerate its cigarette earning growth. The EBIT growth per se in years where the duty hikes have been steep, the earnings growth has been higher. And this has consistently happened, it is not something which has been on and off. Cigarettes obviously are about 8-85 percent of their profits.
In addition to that they have also been able to achieve profitability in other FMCG which goes according to their plan. The market was predicting the attainment of profitability by ITC in their other FMCG division by the end of FY13 which has happened. So every time you predict anything in case of ITC you are able to see that being achieved. So we believe that in case of ITC a 16-18 percent growth is something which could be easily achieved because competition is very low in their most profitable category which is not the case with other companies.
If you look at all the personal care and soaps and detergent players across the board there is competition. That is not the situation with cigarettes. Here the prices are always higher. So even if you see very high duty hikes, on a flat volume growth also ITC is able to show about 18-20 percent growth in EBIT. That is something which is very important in the current uncertain scenario. So we are more positive on ITC. Valuations are higher as compared to what they have been historically, so is the case with the whole sector but within the whole sector if we have to pick something then ITC is the one.