HUL downgraded to SELL; target Rs490

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.


Not much help from RBI even in 2013?

“Policy easing to be limited to about 50-75 bps in 2013,” says Morgan Stanley Research  

Given the central bank’s guidance for monetary policy stance, Morgan Stanley in its research report said “We believe that policy rates would be on hold until the end of 2012 with easing to begin from 1Q2013.” It believes that even as inflation starts to ease from Q12013, it may remain above the RBI’s (Reserve Bank of India) comfort zone for longer. Hence, it expects policy easing to be limited to about 50-75 (basis points) bps in 2013.
RBI held a quarterly review of its monetary policy yesterday. The RBI’s decisions were in line with consensus (Bloomberg survey) and Morgan Stanley’s expectations: The apex bank kept the repo rate and reverse repo rate unchanged at 8% and 7%, respectively. The marginal standing facility (MSF) rate stands at 9%. It reduced the cash reserve ratio (CRR) by 25bps to 4.25% (effective 3 November 2012).
The monetary policy statement from RBI highlights the inflation problem as follows: “The persistence of inflationary pressures even as growth has moderated, remains a key challenge. In this respect, India is an exception to the global trend, which underscores the role of domestic structural factors. Of particular concern are the stickiness of core inflation, mainly on account of supply constraints and the cost-push of rupee depreciation. Consequently, managing inflation and inflation expectations must remain the primary focus of the monetary policy. A central premise of the monetary policy is that low and stable inflation and well-anchored inflation expectations contribute to a conducive investment climate and consumer confidence, which is key to sustained growth on a higher trajectory in the medium-term.”
The RBI recognizes that growth conditions have deteriorated. The policy statement highlights it as follows: “The loss of growth momentum that started in 2011-12 has extended into 2012-13 though the pace of deceleration moderated in the first quarter. Nevertheless, growth remains below trend and persisting weakness in investment activity has clouded the outlook.” 
The worsening of global macro conditions and further accentuation of domestic risks owing to stalled investment spending, weak consumption and declining exports have led the RBI to reduce its growth projection for F2013 to 5.8% from 6.5% earlier, says Morgan Stanley in its research report.
In the monetary policy statement, the RBI highlights that the persistent and large current account and fiscal deficits pose significant risks to the growth outlook and macro stability. A large current account deficit exposes India to global funding risks, putting pressure on the currency. A large fiscal deficit curtails private investment spending.
The policy statement mentions the possibility for monetary policy easing in Q4 F2013. Morgan Stanley highlights from the policy statement, “The reduction in the CRR is intended to pre-empt a prospective tightening of liquidity conditions, thereby keeping liquidity comfortable to support growth. It anticipates the projected inflation trajectory which indicates a rise in inflation before easing in the last quarter. While risks to this trajectory remain, the baseline scenario suggests a reasonable likelihood of further policy easing in the fourth quarter of 2012-13. The above policy guidance will, however, be conditioned by the evolving growth-inflation dynamic.” 
The global investment bank believes that policy reforms that help to correct the bad growth mix issue will be key to reviving growth. In that context, it is tracking policy reforms including the government’s effort (a) to revive investment, (c) to cut fiscal deficit via control of expenditure, and (c) to manage rural wage growth down to reasonable levels. 




4 years ago

Such quick predictions about future confirms the extent of external pressure on India to conform to certain prescriptions and the manner in which pressures build up. GOI’s helplessness in such situations found expression in transfer of stress to RBI. This time RBI managed to withstand the pressure and go by its perceptions. This was possible because Governor Dr Subbarao and Deputy Governor Subir Gokarn were in a position to defend their considered views. The way in which FM responded to the RBI’s stance sends out disturbing signals.



In Reply to M G WARRIER 4 years ago

It would be better if the FM were to do something about the foll:

1) What is being done to stop corruption?

2) What efforts are being made to recover the loot from those proved guilty of corruption?

3) Why not enough is being done to bring back black money stashed abroad?

4) Why are we unable to bring down the high level of inflation? – Are there some who are benefitting ( at the cost of others) from these prevailing high prices?

5) India’s sovereign ratings is on the verge of being downgraded to junk grade

The real fiscal consolidation can happen by addressing the above mentioned issues. And we can return to higher growth rate, credit ratings upgrade. Lower inflation and lower interest rates.

Let us not get the RBI to wash the sins of the corrupt?

Festive season loans and offers: Do they really help you save?

Timed with the festive season, various consumer loans and offers are being thrown at you. Are they worth it? Do you really need them?

Festive season is the time when you would not think twice before loosening your wallet, especially on electronics and other consumer goods. And those special discounts, offers and loans at 0% interest rate attract you all the more. Should you fall for these ‘benefits’ or should you not. Banks are offering consumer loans with varying EMI (equated monthly instalments) options over various time periods, 0% interest loans and 0% processing fees payment options.

Consumer loans

The loans that you get for purchasing these goods are regular personal loans; the only difference being that these loans are directly credited into the sellers’ account instead of handing over the sum to you for making purchases of your choice. This means that the end use of funds is tracked and the financing institution has all the right to come to your home at any time to inspect the condition of goods purchased under loans. The duty of protection and insurance of the goods purchased lies solely on you. In case you do not pay back the loan or destroy the product, the company has full rights to go legal against you.

The majority of finance companies provide loans for products sold by companies under the same umbrella brand. You should check the brand and retailer tie-up before deciding where to take loan from. Also, it is good to shop around for comparison of types of loans offered to you by different finance companies. You could land up with the best deal in market.

The 0% interest rate myth

That’s one attraction no one can resist. Instalments, and that too, without interest? What could be better? But, remember that companies are around to do business. You cannot have the cake and eat it too. Although there is no interest attached to the EMIs per se, finance companies charge you processing fees which is, either fixed or a percentage of the loan amount. For example, Bajaj Finserv Lending offers its 0% Interest Consumer Durables Finance at the following terms:


Now, if you take a loan of Rs15,000 with 0% interest and a processing fee of Rs600 is levied on it, the total cost for you becomes 15,600, which is 4%, one time. You should take these costs into consideration to find out whether it is better to take a personal loan or else go in for 0% interest rate EMI option. Compare this with the offers that online retailers give you.

Online Retailers—Another twist

Online retailers offer easy EMI options on purchase through credit cards round the year through tie-ups with banks. These are either ‘interest’ or ‘processing fee’ free. Some have 0% processing fee if you opt for three-month EMI and a processing fee is levied for a higher tenure. When going for such options calculate the total cost of funds and then take a decision.

For example, if a television costs Rs15,000, and the interest cost at three-month EMI is 0%, you pay Rs5,000 each month for three months. And if the EMI is Rs2,700 for six months’ payment period the total cost come to Rs16,200, which converts to the cost of loan at 8% for six months. This option is cheaper than the 0% interest EMI option. You can look at buying online through these retailers in the festive season too, to find any good offers that would bring the cost down even further.

Final Take

Make a comparison of the total costs of loans on each platform and then take decision. The good part about online retailing is that they deliver goods at your doorstep and save you of all the hassles and cost of transportation. You should, however, be careful of your credit limit and regularity of payment; else you could land up with borrowing costs that are even higher than regular personal loans due to penalty levied for late payment.


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