HUL downgraded on weak volumes, royalty hike in Q3; shares plunge

A number of investment banks, including Credit Suisse and Nomura, cut their ratings on Hindustan Unilever, a day after the country's largest consumer goods maker disappointed investors with slower-than-expected volume growth and a hike in royalty payments.

HUL shares opened sharply lower on Wednesday, falling over 6 per cent on the National Stock Exchange. The stock was the top loser on the 50-share Nifty benchmark.
Domestic brokerage IDFC downgraded HUL to "underperformer" with a target of Rs. 442 per share.

"Lack of volume growth is indicative of increasing pain point in existing portfolio and that is something markets have not taken kindly to," Nikhi Vora of IDFC Securities told NDTV Profit.

Bank of America Merrill Lynch has downgraded HUL to "underperform" and reduced its target on the stock to Rs. 441 per share from earlier Rs. 477 per share. Citi has downgraded HUL to "sell" and reduced its target to Rs. 450 per share from Rs. 494 per share.

HUL reported a 16 per cent jump in third-quarter net profit, but low volume growth and a rise in royalty payments knocked its shares down as much as 5 per cent.

HUL's volume growth at 5 per cent in Q3 was the lowest in the past 13 quarters. EBITDA margins, a key profit parameter, declined by 120 basis points to 13.5 per cent.

The royalty HUL pays to its parent company for use of its trademarks will gradually increase by March 2018 to around 3.15 percent of turnover, from the current 1.4 percent, it said in a statement. Royalty will move up 50 basis points starting February 1, 2013. 30-70 basis points hike will be taken up annually post that.

A one per cent hike in royalty rate is likely to hit HUL's earnings per share by around 5.5-6 per cent, analysts said. As a result, HUL's FY14 earnings per share is estimated to decline by 2.75 per cent toRs. 17.2 while FY15 earnings per share is pegged at Rs. 18.9, indicating a 5 per cent drop.

Less discretionary spending among consumers cut sales of products such as packaged foods and personal care items, but higher prices and lower raw material costs aided margins.


Valuations cut in the offing

HUL trades at a premium to other peers, but a de-rating is likely after third quarter earnings announcement.

HUL stock trades at 28.5 times its 12-month forward earnings, compared with peers ITC's 25.5 times, and Godrej Consumer's 26.5 times, according to Thomson Reuters Starmine Smart Estimate. Dabur trades at 25-times.

HUL downgraded

Credit Suisse cut its rating on Hindustan Unilever to "neutral". CLSA cut the company to "sell" from "outperform," while Nomura cut its rating to "reduce" from "neutral".