JP Morgan downgrades HUL to `Underweight'

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 withrevenue 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.
Source: ET