Sell Hindustan Unilever - TP Rs.398 - Emkay

Sell, Target Price Rs 398 Upgrades are far & thin

Concerns are top down; Driven from Macro side: Our SELL argument on HUL is largely top down from macro standpoint view. The core argument of secular income growth is challenged; (1) urban India facing lower income growth, being curtailed to single-digit and (2) rural India heading for decline in farm incomes amidst depressed farm prices.

Despite that extrapolated growth momentum; Optimistic assumption in itself: Estimation for FY13E and FY14E earnings is largely driven by extrapolation of growth momentum of FY11 & FY12. Assumptions for volume growth are 10% for FY13E & FY14E (Continuation of FY12); which could spring negative surprise on cut-down of consumption expenditure.

Earnings factor best case Ebidta margins: Earnings forecasts for FY13E and FY14E are built on assumption of 15% Ebidta margins. These Ebidta margins are closest to highest Ebidta margins earned in last decade - 15.6% in CY04 i.e. after the price-war in Soaps & Detergents portfolio.

PP is modeled at 17% growth: India's propensity to consume is aptly factored in PP growth of 17% for FY13E and FY14E. This alongside Ebit margins assumption of 25%, translates into healthy contribution to HUL earnings performance. With, introduction of new brands in PP market, there is high probability for heightened competition.

Near term catalysts and earnings performance: Believe that, all positives are fully factored in earnings (factors best case volume growth and Ebidta margins) and valuations (trading @ premium to average valuations). We completely rule-out any room for earnings upgrades. HUL does not offer any comfort in event of negative surprise; it trades at 27.8X FY14E earnings.

Source : Equity Bulls

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