Should investors tender shares in HUL`s open offer?
According to Aditya Birla Money in short term, HUL may underperform the market due to moderating growth, rise in the royalty resulting in modest earnings growth and thereby limiting the valuations multiple. However in medium to long term, HUL will continue to grow at 12-15 percent CAGR, says the research report.
June 25, 2013 / 14:16 IST
Aditya Birla Money's report on Hindustan Unilever (HUL)
Unilever Plc, the Dutch parent company of HUL, has made voluntary open offer for acquisition of 22.52 percent stake in HUL. The $ 5.5 bn open offer is the largest to date offer by any MNC. Globally investors have supported the consumer businesses trying to look for stable growth and good cash flows. FMCG majors are focusing on the Emerging Markets as the next big lever of growth as the balance of power shifts from mature markets like US and Europe towards Emerging Markets. In November last year, GSK Consumer spent ~ Rs. 50 bn to buy back shares in its Indian subsidiary. Now HUL is following suit, considering it as an opportune time to invest in the next phase of growth in India. We believe that the other FMCG majors operating in India may follow suit. So the question arises that should one tender the shares in the open offer/try to switch to some of the other consumer businesses which may not have the same pedigree as Unilever stock.Recent Operating HighlightsHUL has posted healthy volume of 9-10+ percent throughout FY11 and FY12, which has tapered gradually to 5 percent and 6 percent in 3QFY13 and 4QFY13 respectively. The moderation in volume growth is the industry wide phenomenon and this is partially due to weak consumer sentiments led by recent slowdown in Indian economy. We expect volume growth to be muted - in the range of 5-6 percent for FY14E.In addition, HUL has entered into new royalty payment agreement with its parent company, wherein the existing royalty cost of 1.4 percent of turnover will increase, in a phased manner, to a royalty cost of 3.15 percent of turnover by end-FY18, i.e. a total estimated increase of 1.75 percent of turnover.The increase in royalty cost, in the period from 1st February 2013 to 31st March 2014 is estimated to be 0.5 percent of turnover, and thereafter in a range of 0.3 percent to 0.7 percent of turnover in each financial year.Post the 4QFY13 results, on 30th April 2013, Unilever PLC made voluntary open offer for acquisition of 22.52 percent stake in HUL @ Rs 600/share. After this announcement, the stock is hovering in the range of Rs 575-595.As per consensus estimates, for FY13-FY15E period, HUL’s topline is expected to grow in the range 13-15 percent and bottomline at 10-12 percent. We believe the growth estimates are conservative, taking into account the cautious mood of street with regards to weak consumer sentiments in Indian market and ongoing upheaval in international market, led by tapering of QE program in US and bad shape of Euro zone. With softening in global commodity prices and focus on premiumisation, there is fair chance of improvement in margins and hence earnings going forward. In addition, the voluntary open offer of parent Unilever PLC to increase stake in HUL itself is testimony to the healthy growth of FMCG industry in India over next 10-15 years. In short term, HUL may underperform the market due to moderating growth(5-6 percent over next couple of quarters), rise in the royalty resulting in modest earnings growth and thereby limiting the valuations multiple. However in medium to long term, HUL will continue to grow at 12-15 percent CAGR.Valuations and Outlook: "At open offer price of Rs 600, the stock is trading at P/E ratio of 35.9x and 32.3x FY14E and FY15E earnings respectively. On the other hand, the average FY15E P/E multiple of domestic FMCG industry is ~25x. Currently, we believe the fair value of the stock should be 540-560/share, based on 29x-30x FY15E P/E multiple," says Aditya Birla Money research report.Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. 
Read More
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
