HUL won't breach Rs 550; FMCG growth to be slow: StanChart

Sanjay Singh of Standard Chartered Securities speaks about his outlook for Hindustan Unilever (HUL) stock. He feels that HUL is still hung over on the open offer and valuations will take some time to stabilise to fundamental levels. However, he does not see the stock falling below Rs 550.

On the fast moving consumer goods (FMCG) sector, he says, topline has been slow across all companies in Q1. There will be pressure on the volume growth for FMCG in the near-term, he says. The margins are not expected to hold up in the subsequent quarters despite softening in prices of raw materials, Singh adds. He feels that ITC is still a preferred stock among largecap packs. He advises on sticking to largecaps as they had the ability to withstand economic instability. Also read: Dovish RBI! How soon will it rollback INR tightening steps? Below is the edited transcript of his interview to CNBC-TV18. Q: Hindustan Unilever (HUL) has started a multi-year correction. How are you approaching it now, do you think these valuations look justified at all? What level do you think the stock will stabilise at? A: We have written in our note that because of the open offer hangover, it will be a long time before HUL stocks prices align to fundamentals. Hence valuations will be little ahead of historical. There is no point in comparing historical valuations. Also, many of the medium term short-term investors have moved out of the stock in the open offer. Whoever is left is having a long call only. Even they are probably underweight on the stock. Given this background, we will not see any dramatic fall in the stock in the near term in the next three-six months. Hence our call has been even before the open offer that the stock will not go below Rs 550. It is the floor for this stock and I would look at buying the stock at those levels if at all it comes near that. Q: There are some disturbing trends in the entire consumer goods space. What are the important cues that investors should focus on in the next quarters? A: There is little hope and belief that top line growth or volume growth in consumer will be healthy even if economy is weak for a long time. That assumption is getting challenged as we go forward quarter by quarter. Probably we saw some of it this quarter; we saw some of it in the Nielsen data that HUL has presented. So even ITC cigarette volumes, everybody was expecting flat volumes but the 2 percent decline was a little negative. So, volume growth will be under pressure. Could it be as worse as 2002, could it be little better only time will tell. Our sense is that, it will go bad, it will not be as worse as 2002. But if you take HUL as a bench mark, we will not be surprised if HUL reports a flat volume growth in the next couple of quarters and that too on a low base. So volume growth is coming down across companies but the second part is margins. There is lot of hope that margins will be holding on, even increasing because of commodity prices softening. However rupee has clearly taken the benefits of raw material price softening. Even the guidelines of TRAI can increase media spends quite significantly in the near term. Lastly tax rates are increasing across the board. So you put this all together and what you get is a very poor earnings growth. May be for the sector if you leave apart ITC I think just about a high single digit earning growth is something which is possible. And given the valuations the stocks are completely avoid other than the fact that it is necessary from a portfolio perspective because given where economy is going, the investable universe is very small. _PAGEBREAK_ Q: So, given all the concerns that are building up on the large cap companies would you look at names like Titan Industries or Dabur, names that can be considered by investors even at these valuations or are these companies also horribly expensive? A: Our call has been very clear that fundamentally nothing looks good. There is no point saying this looks good or that looks better. So from absolute investor perspective everything is completely avoidable from a 12 months perspective. Having said that, from institutional investor perspective, they need to wait in the sector, because it is a defensive one. And, if economy becomes worse from here, even stays here for a long time probably the sector will still outperform. Hence the thought is very clear, stick to large caps, stick to ITC, HUL to an extent, may be Asian paints. So stick to the large caps because there their ability to withstand a bad economy is much better and also some of these stocks are very well diversified in terms of holdings. Earlier, we have spoken about how a very concentrated Foreign Institutional Investor (FII) holding in some of the midcaps can pose a pressure if performance of these companies worsened. Or if there is a whole macro emerging market pullout or macro India pullout of funds then some of these midcaps can suffer just because of sell off rather than any fundamentals. So any investor with portfolio perspective should stick to large caps, HUL, ITC, Asian Paints and the likes.