Motilal Oswal has maintained 'Sell' on Hindustan Unilever (HUL) with target price of Rs 565 as against the current price of Rs 590.
Commenting on the investment rationale, the stock broker said, "According the management, growth for the consumer sector moderated during the December quarter (3QFY14) both in terms of volume and value, driven by deteriorating demand. We believe 4QFY14 could be weaker than 3QFY14 for HUL.
The moderation is across categories and geographies, with discretionary categories facing disproportionate impact. The beneficial effect of a good monsoon has not been felt, reflecting the non-relevance of monsoon swings (barring sentiment boost). While it has not seen down-trading, HUL is witnessing slowdown in the pace of premiumization.
4QFY14 will face tough comparisons due to 100bp positive impact of pipeline filling ahead of the transporters’ strike in the base quarter. While pricing has improved in Soaps due to raw material inflation, in Beverages, pricing will fade further due to anniversary effect. Pricing contribution to sequential revenue growth could remain flat. We build 8% revenue growth for 4QFY14.
Personal Products performance has progressively worsened, with industry panel data indicating moderation in growth rate for Oral Care, as well. Skin Care continues to be the most impacted part of HUL’s portfolio. However, the management has indicated encouraging response to the Fair & Lovely (FAL) relaunch.
We note that 4QFY13 had 10% volume promotion; hence, reported performance will be subdued to that extent. However, Personal Products segment margins will have a benign base (200bp margin decline in 4QFY13). The Processed Foods portfolio will be impacted by slowdown in discretionary spends, but Soups are doing well. In Ice-creams, HUL is extending Magnum to five metro markets.
While competitive intensity has not changed meaningfully and media GRPs continue to hold, non-Consumer GRPs is lower, putting downward pressure on prices. Therefore, media inflation is benign vis-à-vis 3QFY14. The management has revised its tax rate guidance for FY14 to 25.5-26% from 24.5-25.5% earlier. We have cut our estimates for FY14-16 by a marginal 0.5%.
Weak macros (low GDP growth, high inflation and weak consumer sentiment) are taking a toll on broader consumer spends, as disposable incomes have remained flattish. HUL, being the barometer of Consumer spends in India, is reflecting the same."
