Reiterate Sell on HUL; price cuts to impact margins: Anand Rathi

MUMBAI: Anand Rathi Securities has recommended investors to sell shares of Hindustan Unilever as the company’s plans to cut prices would impact margins.

“Keener competition has pushed Hindustan Unilever to cut prices. We expect price cuts and higher raw material prices to slice margins and earnings. We thus lower FY11e earnings 13.7% and the target price to Rs204 (from Rs249),” said the brokerage firm.

The company has cut the prices of key detergent brands 10-29% after price cuts by P&G. It has also cut the prices of Lux and Lifebuoy soaps by around 6-7%. This is being done to regain market share and grow volume. The detergent price war in CY04 saw margins of the soaps and detergents segment slide from 25% in CY03 to 17% in CY04. Nonetheless, the price cuts helped Hindustan Unilever retain market share in detergents.

“We expect price cuts, rising raw material prices, higher excise, media and transportation costs to impact margins by 120bps in FY11. We lower FY11 revenue and net profit estimates, by 1.3% and 13.7%, respectively, to factor in price cuts and higher raw material prices and higher tax rate.

We value the stock at Rs204, at a target PE of 20x FY11e earnings. Our target PE is at a 25% premium to the Nifty, compared with the 64% premium HUL has traded at over the past five years. We expect the premium to decline as earnings fall,” it added.