Unilever may not get 22.5% in HUL at Rs 600/shr: Damani

Unilever's offer of Rs 600 per share for an additional 22.5 percent in subsidiary Hindustan Unilever may not get a good enough response, says Ramesh Damani, a market expert, and a shareholder in HUL.

"My sense is that it would be hard to get 20 percent plus in Rs 100 difference," Damani said in an interview to CNBC-TV18, though he added that the offer was a big vote of confidence in the Indian consumer story.

"They probably will have to revise this offer at some point. HUL historically has been always the most expensive share and now if you look at globally whether in the United States, Great Britain or in India the stocks that are being valued most by investors are ones with the stable cash flow, ones with the good consumer franchise," Damani said.

Below is the edited transcript of Damani’s interview to CNBC-TV18. Q: This surely would have taken you by surprise, such a big demonstration of confidence from the Hindustan Unilever (HUL) parent? A: Absolutely. It is a great boost of confidence particularly at a time when a lot of stocks have been floundering in the market. What Glaxo did or what HUL is doing sends a message that the Indian consumer stories are alive and that perhaps the foreigners are more bullish on India than the Indian themselves. It is great news. I am an owner of HUL for a long time. So, as an owner and as an investor, it is very nice to see Unilever making such a big commitment to India. Q: What about the price itself? Where do you see the stock open up now? A: It is going to open sharply higher. They need to increase the holding from 51 percent to 75 percent and that is unlikely to happen at a Rs 100 premium. A stock like HUL is so well accounted for, it is hard to imagine them getting that much at Rs 100 difference. I think it will open substantially higher. If one looks at what happened to United Spirits recently, once the partners established the benchmark price, it opened significantly higher. So, my sense is that it would be hard to get 20 percent plus in Rs 100 difference. Q: You probably will not be tendering a single share at Rs 600, but do you think people will given that there have been so much fretting about HUL’s valuations and slowing consumption etc.? Do you think they will get some stock or this will prove to people that they should not be selling out now with the promoter exhibiting confidence and they should be sitting on the stock? A: It will be the latter. I think they will get some stock, but I do not think that there is very serious quantity of shares available at this point. If you recall, HUL has done a buyback at Rs 280 level maybe a few years back already. So they had already marked up some percentage in buyback when HUL’s fortunes were on the downswing. So this is a big boost of confidence. I would be surprised if they could meet their holding of 75 percent based on this offer. They probably will have to revise this offer at some point. HUL historically has been always the most expensive share and now if you look at globally whether in the United States, Great Britain or in India the stocks that are being valued most by investors are ones with the stable cash flow, ones with the good consumer franchise. So, investors know the value of these stocks now, particularly in times when we are going to a period of uncertainly about earnings, low interest rates, how valuable a consumer cash flow franchise is. My personal sense is that they would not reach the target atleast in this month.

Q: What does the parent’s confidence tell you about the volume growth going ahead? HUL did six percent this time around, but many analysts are pointing out that it could get to double digit very soon as well? A: It should. It largely depends on GDP growth coming back at 8 percent or so. HUL is such a large big consumer play that it is hard to see it growing beyond GDP very easily. It will happen ultimately, but the overall economy has to improve. It was a matter of time. The thing that people do not understand about HUL is that it is always going to be expensive in terms of the market because of the stability of its cash flow, high dividend payout ratio and the certainty of its business. It is a stock that is never going to be very cheap in Indian market.