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STOCK UPDATE Hindustan Unilever
Recommendation: Reduce
Price target: Rs520
Current market price: Rs555 Premium valuation unsustainable, maintain Reduce Key points -
Hindustan Unilever is expected to post a subdued operating performance in the coming quarters because: (1) the sales volume growth in the domestic consumer business is likely to remain in mid single digits (4-5%) in a sluggish demand environment; and (2) the rising input prices (prices of palm oil and LAB up by 17% and 10% respectively) is likely to affect its profitability going ahead. -
Though the stock has corrected in recent times, but it commands a substantial premium of 117% (way ahead of the mean premium of 82%) to the Sensex. Also, the current valuation of 30x FY2015E earnings is at premium to the average of one-year forward PE multiple of 28x of the past five years. -
The existing premium valuation is not sustainable against the backdrop of the present growth concerns. Moreover, we believe that the ongoing churn in the market from defensive stocks to high beta stocks in the cyclical and industrial sectors would result in selling pressure on Hindustan Unilever on rallies. Hence, we maintain our Reduce rating on the stock with a revised price target of Rs520. On the other hand, we maintain our positive stance on ITC in the large-cap FMCG space due to its strong cash generation ability and better earnings visibility.
VIEWPOINT Arvind Emerging brand play; correction provides opportunity Key point -
Since our last View Point note (dated January 31, 2014) on Arvind, the stock has appreciated by 10% (at the peak levels) and has also corrected afterwards owing to the risk associated with the rupee's appreciation against the dollar. The weakness in the rupee has turned the sentiment negative for the export driven sectors, affecting Arvind's stock performance as well. Over the last five sessions, the stock has corrected by 10% and currently trades at an attractive valuation of 5x and 4.4x its FY2015 and FY2016 EV/EBITDA respectively. We believe the correction provides an opportunity to accumulate the stock, which is growing strong and is fast turning into a brand and retail play.
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