CLSA downgrades HUL to ‘sell’ from ‘underperform’

MUMBAI: CLSA has downgraded FMCG major Hindustan Unilever to ‘sell from ‘underperform’ with a target price of Rs 430 following a sharp run-up in the stock price recently.

HUL has plunged 11 per cent so far in the year 2013 as compare to 4 per cent fall in the BSE Sensex. The stock gained almost 60 per cent in the year 2012.

According to the brokerage, the company faces issues like continued weak macro, deceleration in revenue growth in soaps and detergents, margins to be passed on to customers and weak trend in discretionary segments.

It is of the view that despite the de-rating, current valuations at 27x one year forward earnings are rich in the context of less than 10 per cent EPS growth.

“While the concerns on growth and increase in royalty have brought down HUL’s PE from a peak of 35x to 27x now.. ..we still find these valuations expensive in the context of a moderate less than 10 per cent EPS CAGR over FY13-15CL,” the report said.

“We remain negative on the stock though, downgrade the stock to 'sell' following the recent run-up in the stock price,” the report added.

CLSA’s channel check indicates that the consumer sentiment remained weak and there has been increased pressure on consumer wallets due to inflation.

The impact of weak macro has been most prominent in case of discretionary part of portfolio which mainly includes skin and packaged foods. Sales of ‘Fair & Lovely’ sachet continue to grow at moderate pace.

The key risk factors to CLSA’s view include faster than expected recovery in growth and continued volatility in the markets which may benefit defensive stock like HUL.

At 11:30 a.m.; the stock was at Rs 469.15, down 0.70 per cent, on the BSE. It touched a high of Rs 472.35 and a low of Rs 466.15 in trade today.