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Espirito Santo believes that slowing volumes and increased competition coupled with high valuation means it is time to sell HUL
Espirito Santo Securities has echoed Hindustan Unilever’s (HUL) concerns with volume and has downgraded the stock from neutral to SELL. It feels that consumer demand has weakened which led to lower volumes and thereby lower turnover. “Consumers may shift away from branded consumer goods in times of high inflation. Availability of alternatives (local toothpaste, unpackaged foods) motivates consumers to shift, and frequent price increases by companies just act as catalyst for this migration,” Espirito Santo said in its research report on HUL. The report finally says, “Consensus is factoring in ~16.1% EBITDA margins in FY15, which we believe is not achievable in the current macroeconomic environment.” Espirito Santo believes the fair value of Rs490 per share. At time of writing this piece, the share price stood at Rs547.45.
We had written a brief report on HUL results here. However, Espirito Santo has viewed the results from the volume and valuation prism. We feel long term investors would be better off holding the company for as long as they can. However, short-term investors and traders could change their strategy if they are to believe that HUL is overvalued. The brokerage said, “We think the earnings upgrade cycle has moved a little too far and the stock is exposed to downside risks from current levels. We reduce our fair value from Rs 524 to Rs 490 and downgrade HUL to SELL from Neutral.” The stock price of HUL had been on a rise in the last one to two years.
On the volumes side, it seems to have missed estimates by more than one percentage point as volumes grew by 7%. As HUL ramped up volumes and reached a point where one percentage point can mean a difference between good performance and mediocre results, the report said, “Robust growth followed by premiumization, has resulted in healthy headline volume growth. However, personal product growth is tapering off while lacklustre growth continues in the packaged foods category; clearly a sign of concern.”
One of the biggest edge that bigger players, like HUL, has is its sheer scale, economies and size. Because of its supply-chain expertise, it is able to keep the cost of goods sold down, though this gap seems to be reducing. This squeezes out the smaller players out of business as its bargaining power tends to be restricted as is its ad-spend. Another factor that led to a good quarter (in value terms, not volume terms) is lower input costs and stable crude. This kept costs down significantly to a great extent to make up for the loss incurred due to lower volumes.
The report says that slowing volumes is the result that ad-spend have increased, in order to increase their brand visibility. While this is true, the same would be applied for smaller players as well, who are desperately seeking attention. If the smaller players indeed crave for visibility, their ad-spend would increase their cost of goods sold and that would hurt profitability.