 "Broking firms split on outlook for HUL")
Half the broking firms have a sell/reduce rating on the Hindustan Unilever's (HUL) stock, largely due to fears of a decline in this counter post the open offer. The other half have neutral/hold given that the longer term prospects of the company remain intact.
Of the 10 brokerages with a recommendation on HUL since June 1, according to Bloomberg, five have a "Sell", while the rest have a "Hold" or "Neutral" rating on the stock. Analysts are bearish on HUL due to an expected slowdown in the fast moving consumer goods (FMCG) sector, on weakening consumer sentiment. Also, the falling rupee could make imported raw materials costlier, creating pressure on margins.
"One of the biggest overhangs on the stock over the past few months has been a sustained decline in volume growth of the core business. Volume growth, which reached a peak of 14 per cent in March 2011, touched a 12-quarter low of five per cent in December 2012, before recovering marginally to six per cent in the latest March quarter. Hence, we are building in six-seven per cent volume growth in the near term, against the long-term average of around nine per cent," said Manish Jain, an analyst with Nomura Equity Research.
But, slowing growth is also something other FMCG companies have experienced. Prominent companies like Nestle India and Colgate have also seen a slowdown in volume growth in recent quarters, which could pick up once the economic environment improves. The good monsoon and the uptick in minimum support prices for various crops should boost income levels of rural India, which contributes 30-40 per cent to sales for many of these FMCG companies.
Since the open offer was announced on April 30, the share price of HUL, India's largest player in the FMCG category with leading brands, shot up 18 per cent. But, given the average one-year stock price target at Rs 539.33 according to Bloomberg data, the downside from current levels of Rs 585 is just eight per cent.
With respect to similar open offers that closed after January 1, 2012 (or are open currently), in 10 of the 14 offers the stock of the Indian subsidiary is quoting at below the price a day prior to the open offer. The fall range is 5-80 per cent, with the average decline being 27.9 per cent. In the case of the four stocks quoting higher, the range is 18-77 per cent, with the average gain being 32.7 per cent.
Aiming to increase its stake from the existing 52.5 per cent to 75 per cent, parent company Unilever Plc announced a $5.4 billion (Rs 33,000 crore) open offer at Rs 600 a share; the price was 20 per cent higher than the price at the time of announcement on April 30. The offer opened on June 21 and closes on July 4. While many brokerages say the offer price is "attractive" for retail investors, institutional investors led by Aberdeen and Life Insurance Corporation of India are not very enthused with it being closer to the increased share price in the open market.
While there could be short-term gains for investors wanting to sell out, long-term investors should stay put, believe experts. On the one hand, while the parent's commitment is huge, given that it will be investing $5 billion to up its stake in HUL, the penetration levels of most of the FMCG categories are way below international averages. This indicates the long-term potential of the Indian markets and the growth opportunities for companies like HUL. Once growth rates pick up, the share prices of these companies could also gain. HUL, for instance, has seen its stock deliver a CAGR of 18 per cent during the five years ending October 2012, when growth rates started slowing.
"We remain positive on HUL and expect it to post six-eight per cent volume growth in the coming quarters. The parent company is very bullish on India and will not delist in India. The open offer should allay royalty concerns, as now the company will launch more products. Given the high valuations, outperformance will depend on business performance. We think long-term investors should wait and not tender shares in the open offer", said Abneesh Roy, FMCG analyst at Edelweiss Securities, to Business Standard in May.
Abhijeet Kundu, an analyst with Antique Stock Broking Ltd, said, "At the open offer price in our best case scenario, the stock would be valued at 33.5 times and 27.5 times based on in FY14 and FY15 estimates, respectively. Further, considering our base case estimates and valuations, the offer price values the stock at a premium valuation, PE of 35.4 times in FY14 and 31.2 times FY15 estimated." In the past five years (till April 30 when the offer was announced), HUL stock's average PE works out to 33.5-the lowest being 23.4 in September 2010 and the highest being 48.7 in October 2012.
Nevertheless, investors desiring to sell their shares could look at doing so in the open market, as it would be more tax-efficient. Exiting through the open offer will attract capital gains tax, which would not be the case for off-loading stocks in the open market, wherein investors will be subject to capital gains (only incase of short-term gains).
Of the 10 brokerages with a recommendation on HUL since June 1, according to Bloomberg, five have a "Sell", while the rest have a "Hold" or "Neutral" rating on the stock. Analysts are bearish on HUL due to an expected slowdown in the fast moving consumer goods (FMCG) sector, on weakening consumer sentiment. Also, the falling rupee could make imported raw materials costlier, creating pressure on margins.
"One of the biggest overhangs on the stock over the past few months has been a sustained decline in volume growth of the core business. Volume growth, which reached a peak of 14 per cent in March 2011, touched a 12-quarter low of five per cent in December 2012, before recovering marginally to six per cent in the latest March quarter. Hence, we are building in six-seven per cent volume growth in the near term, against the long-term average of around nine per cent," said Manish Jain, an analyst with Nomura Equity Research.
But, slowing growth is also something other FMCG companies have experienced. Prominent companies like Nestle India and Colgate have also seen a slowdown in volume growth in recent quarters, which could pick up once the economic environment improves. The good monsoon and the uptick in minimum support prices for various crops should boost income levels of rural India, which contributes 30-40 per cent to sales for many of these FMCG companies.
Since the open offer was announced on April 30, the share price of HUL, India's largest player in the FMCG category with leading brands, shot up 18 per cent. But, given the average one-year stock price target at Rs 539.33 according to Bloomberg data, the downside from current levels of Rs 585 is just eight per cent.
With respect to similar open offers that closed after January 1, 2012 (or are open currently), in 10 of the 14 offers the stock of the Indian subsidiary is quoting at below the price a day prior to the open offer. The fall range is 5-80 per cent, with the average decline being 27.9 per cent. In the case of the four stocks quoting higher, the range is 18-77 per cent, with the average gain being 32.7 per cent.
Aiming to increase its stake from the existing 52.5 per cent to 75 per cent, parent company Unilever Plc announced a $5.4 billion (Rs 33,000 crore) open offer at Rs 600 a share; the price was 20 per cent higher than the price at the time of announcement on April 30. The offer opened on June 21 and closes on July 4. While many brokerages say the offer price is "attractive" for retail investors, institutional investors led by Aberdeen and Life Insurance Corporation of India are not very enthused with it being closer to the increased share price in the open market.
While there could be short-term gains for investors wanting to sell out, long-term investors should stay put, believe experts. On the one hand, while the parent's commitment is huge, given that it will be investing $5 billion to up its stake in HUL, the penetration levels of most of the FMCG categories are way below international averages. This indicates the long-term potential of the Indian markets and the growth opportunities for companies like HUL. Once growth rates pick up, the share prices of these companies could also gain. HUL, for instance, has seen its stock deliver a CAGR of 18 per cent during the five years ending October 2012, when growth rates started slowing.
"We remain positive on HUL and expect it to post six-eight per cent volume growth in the coming quarters. The parent company is very bullish on India and will not delist in India. The open offer should allay royalty concerns, as now the company will launch more products. Given the high valuations, outperformance will depend on business performance. We think long-term investors should wait and not tender shares in the open offer", said Abneesh Roy, FMCG analyst at Edelweiss Securities, to Business Standard in May.
Abhijeet Kundu, an analyst with Antique Stock Broking Ltd, said, "At the open offer price in our best case scenario, the stock would be valued at 33.5 times and 27.5 times based on in FY14 and FY15 estimates, respectively. Further, considering our base case estimates and valuations, the offer price values the stock at a premium valuation, PE of 35.4 times in FY14 and 31.2 times FY15 estimated." In the past five years (till April 30 when the offer was announced), HUL stock's average PE works out to 33.5-the lowest being 23.4 in September 2010 and the highest being 48.7 in October 2012.
Nevertheless, investors desiring to sell their shares could look at doing so in the open market, as it would be more tax-efficient. Exiting through the open offer will attract capital gains tax, which would not be the case for off-loading stocks in the open market, wherein investors will be subject to capital gains (only incase of short-term gains).