Sell HUL; target of Rs 253: Prabhudas Lilladher

Prabhudas Lilladher is bearish on Hindustan Unilever and has recommended sell rating on the stock with a target of Rs 253 in its October 25, 2010 research report.
“Hindustan Unilever, nominal 1% volume growth in the base quarter, coupled with heavy ad spends of last 4-5 quarters, resulted in 14% volume growth, unsustainable in our view. Pricing environment, though, is not as destructive as it was two quarters back; it is far away from getting benign. Though revenue growth was in-line with expectations, PAT at Rs 5.32 billion came in ahead of expectations (Rs 5.06 billion) owing to a 60% jump in other income.”
“Despite a 40bps improvement each in gross margin and employee expenses, EBITDA margins declined 160bps YoY, mainly due to other expenses which went up 230bps YoY. Barring Ice Creams and Processed Foods, margins declined in every category, with Personal  Skin Care reporting a severe 330bps decline YoY to 23%. Ad spends at 13.6% has declined sequentially for the first time in the last seven quarters after trending up from 8.6% in December 2008 to 15.4% in June 2010. However, we expect a step-up in the competitive intensity, especially in Personal Care categories in the next two quarters and hence, rule out any material leeway from a decline in ad spends.”
“Sustainable double-digit volume growth is difficult to come by as the base becomes tougher, going forward (5% and 11% volume growth in Q3 and Q4FY10). Even though the Detergent price war is behind us, we don’t expect any significant improvement in the pricing power, given our expectations of elevated competitive pressures in Personal Care categories (Oral Care, Skin Care). However, we now value Hindustan Unilever (HUVR) at 22x FY12e EPS, to arrive at our revised target price of Rs 253 (Rs 218 earlier). At the current price, HUVR is trading at 26.6x FY12e, with downside risks to earnings. Maintain ‘Sell’,” says Prabhudas Lilladher research report.
Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management.Moneycontrol.com advises users to check with certified experts before taking any investment decisions.