HUL's FY16 earnings est to see upward revision: SBICAP Sec

Ekta: We have seen multiple upgrades coming on HUL because it is one of the key beneficiaries of lower crude prices. Can you tell us what the input price scenario currently looks like for HUL and how much of an impact we could see on the margins?

A: There are a couple of factors that will impact HUL with the fall in the crude oil prices. You cannot just isolate the fall in crude oil prices in one go and just assume that the benefit will only accrue, that only benefits would accrue. First of all, yes, it is a fact that Lloyd Blend (LLB) which is a derivative of crude oil and also the other cost which is basically related to packaging can definitely see significant reduction going ahead also. LLB is already down 27 percent year-on-year. So around somewhere close to 30 percent of the total cost is definitely seeing a sharp correction offlate.

So if you see that usually all these companies do hold a lot of inventories so we feel that there will be a lag effect coming in for the benefits also. So we do expect that Q3 and Q4 of FY15 will see some benefit and FY16 going ahead will definitely see a lot of benefit going in.

If we try to understand as in what the positive impact would be, we feel that historically also when prices were low for crude oil prices or the benchmark cost basket was also benign, in those years also the gross margin never topped more than 49 percent for HUL and we feel that even in this scenario going more than that will not be possible because the moment the raw material cost fall, there are new players, the smaller marginal players they start coming into the market, gross margins therefore and realisations are therefore under pressure and a lot of incentives and promotions are given out in order to encourage more volumes. So I think in all we have put these factors with the tailwind coming in, there will be also some headwind in terms of topline growth also.

Anuj: What is your call on the stock now at Rs 800 because valuation wise clearly it is now trading at higher than the historical averages?

A: HUL has always for the past five years traded above its historical averages and it also commands a premium over the sector. Having said that, we feel that at least 10-12 percent upgrade to the earnings is definitely going to come in FY16 no matter how bearish you are about the stock. There is definitely some operational leverage that will come in somewhere to the tune of 100 bps of expansion in the EBITDA margin level. Even if you assume that the ad spends will go up leading to somewhere close to 12 percent of EPS upgrade across the board. So even if you assume that, based on FY16 and FY17 earnings it is still trading at Rs 800, trading at somewhere close to 33 times FY17 earnings which is not a cheap stock to start with.

However, if you are slightly more aggressive on the call in terms of volumes also picking up along with inflation being low then yes definitely you are seeing higher earnings growth somewhere close to 20 percent growth going ahead. So it depends on the outlook completely and we feel that another 10-12 percent upgrade - there is a maximum upgrade to the earnings that is possible.

Ekta: Can you tell us what your rating on HUL currently is, target price and what your top picks within the sector also?

A: We are revising our target after the crude oil benefits and all that. However, the last rating was a sell rating with Rs 543 target.

Ekta: Any other picks within the consumer discretionary space?

A: We feel that Marico could benefit in the scenario as well given that the copra prices are slightly falling off sequentially yes they have slightly fallen and we feel that the vegetable oil basket has also slightly fallen and we feel that they are definitely going to benefit from this. So for Marico, we are looking at a target of somewhere close to Rs 330.