JP Morgan downgrades HUL to `Underweight'
JP Morgan downgrades HUL to `Underweight' and cuts the March 2010 target price from Rs 275 to Rs 230.
HINDUSTAN UNILEVER
RESEARCH: JP MORGAN
RATING: UNDERWEIGHT
CMP: Rs 224
JP Morgan downgrades HUL to `Underweight' and cuts the March 2010 target price from Rs 275 to Rs 230. In the long term, an Underweight rating on Hindustan Unilever seems straightforward, due to a dearth of growth, intensifying competition, and lack of operating leverage. JP Morgan expects earnings to grow in line with revenue and believe they are unlikely to grow fast enough to justify a multiple more than 2x that of the local market.
Despite these well-accepted long-term concerns, the stock has outperformed year to date. This is because the market views HUL as a great defensive stock, and expects strong earnings growth in FY10 from margin expansion due to commodity deflation. Even the parent Unilever, which derives most revenue from developed markets, could see a margin decline in 1H09 from substantial down-trading.
And on margins, despite assuming liberal benefits from commodity, JP Morgan estimates are in line with consensus. The new price target is based on 20x forward earnings, which is a sufficiently liberal premium to the market's multiples to reflect HUL's inherent strengths of a dominant market share, unleverageed balance sheet, and the quasi-staple demand for its products.
RESEARCH: JP MORGAN
RATING: UNDERWEIGHT
CMP: Rs 224
JP Morgan downgrades HUL to `Underweight' and cuts the March 2010 target price from Rs 275 to Rs 230. In the long term, an Underweight rating on Hindustan Unilever seems straightforward, due to a dearth of growth, intensifying competition, and lack of operating leverage. JP Morgan expects earnings to grow in line with revenue and believe they are unlikely to grow fast enough to justify a multiple more than 2x that of the local market.
Despite these well-accepted long-term concerns, the stock has outperformed year to date. This is because the market views HUL as a great defensive stock, and expects strong earnings growth in FY10 from margin expansion due to commodity deflation. Even the parent Unilever, which derives most revenue from developed markets, could see a margin decline in 1H09 from substantial down-trading.
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And on margins, despite assuming liberal benefits from commodity, JP Morgan estimates are in line with consensus. The new price target is based on 20x forward earnings, which is a sufficiently liberal premium to the market's multiples to reflect HUL's inherent strengths of a dominant market share, unleverageed balance sheet, and the quasi-staple demand for its products.
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