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Last Updated : Oct 29, 2013 04:05 PM IST | Source: CNBC-TV18

Brokerages unimpressed with FMCG Q2; cut ratings, estimates

Brokerages are not very impressed with the performance put up by the FMCG majors HUL and ITC. They have cut their ratings for the stock and have also reduced estimates for the next two fiscals.

The two heavyweights of the FMCG pack - HUL and ITC may have delivered Q2 results which are more or less in-line with expectations, but they have fallen short of impressing brokerages. Analysts have now cut their ratings on the stock and estimates for the next two fiscals, reports CNBC-TV18’s Farah Bookwala.

Brokerages are bullish on both HUL and ITC in the long-term, but it is the short-term outlook that is a cause of concern. Their earnings were a mixed bag, dragged down by key segments that are not keeping pace. It has prompted brokerages to slash the rating on their stocks and earnings per share estimates over FY14-16.

Also read: Is the great Indian consumption theme tiring?

In case of HUL, Nomura has issued a "reduce" rating on the stock and the brokerage states that they expect valuations to correct over the next couple of quarters as margins come under pressure.

CLSA has issued a "sell" rating on the stock saying the valuations are rich in the context of a moderate 10 percent EPS CAGR over FY14-16.

Meanwhile, JP Morgan is "underweight" on the stock.

In case of ITC, the performance of the cigarette business, its main contributor to revenue has taken a toll on its stock rating.

Volumes in the cigarette business fell a steep 3.5 percent this quarter. The company has taken a blended price of 18 percent over the past year which helped sales grow 11 percent YoY even as volumes declined.

Credit Suisse too maintains an "outperform" rating on the stock, stating that it expects the decline in cigarette volumes to gradually recover in the second half as customers get accustomed to elevated prices. However, even post recovery, it expects volumes to decline at least 3 percent YoY. Given this, it has cut its EPS estimates over FY14-15 by more than 2 percent.

Meanwhile, JP Morgan has revised down their EPS estimates for FY14-15 by 1-1.5 percent.

For both companies, the third quarter will be crucial, as they will be judged by their ability to improve volumes and margins in key segments while pricing action remains judicious.

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First Published on Oct 28, 2013 10:17 pm
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