Hindustan Unilever Limited - Attractive exit option - Antique

Unilever PLC (along with Unilever NV in its capacity as person acting in concert (PAC) with the acquirer) , the parent company of Hindustan Unilever Ltd has made a voluntary open offer to acquire 487,004,772 (487m shares) of its Indian subsidiary, aggregating to about 22.52% of the total share capital of HUL. The offer price has been fixed at INR600. Through the open offer the parent company plans to increase its current stake in the subsidiary from about 52.48% to 75%.

We believe that the minority shareholders should tender to the open offer price of INR600 as the same offers an attractive exit price even in the best of the scenarios. At the open offer price in our best case scenario EPS, the stock would be valued at 33.5x FY14e and 27.5x FY15e. Furthermore considering our base case estimates and valuations, the offer price of INR600 values the stock at a premium valuation, PE of 35.4x FY14e and 31.2x FY15e.

In our best case scenario, we have assumed a 15% CAGR in sales and 20% CAGR in EPS during FY13-FY15. These assumptions therefore factor a healthy growth in sales on a high base of FY13 and a challenging environment where FMCG demand is slated to witness continued moderation during the year, reflecting the impact of the GDP slowdown with a lag. Further it also factors a modest 13% CAGR in ad-spends in a scenario where ad-spends are expected to gain momentum to get the maximum mindshare of the consumer to garner higher market share in a shrinking market. Additionally we have also factored in flat to marginal increase in other expenditure as percentage of net sales at 14.9% and 15.1% during FY14 and FY15 respectively as against 14.9% during FY13.

In our best case scenario, we arrive at a fair value of INR662, implying a PE of 30x on an aggressive EPS growth estimate of 20% CAGR during FY13-FY15. Such a scenario would provide a 10% upside from the open offer price. However we strongly believe that the aggressive assumptions in the best case scenario have a very low probability to fall through. On the contrary, we believe that the current challenging environment has a high probability to provide better and lower entry points to investors.

However, investors with a long-term view could remain invested in the stock as the long-term potential of the India consumption story backed by low per capita consumption continues to be strong. Additionally the open offer by the parent company signifies its commitment towards Indian operations, which in turn would mean higher intensity of innovation and product launches in the coming years. The Indian management also has shown renewed aggression during the last 3-4 years and has focused on gaining market share as against profitability, which we believe is a positive step for the future growth of the company.

However, in the short term, we strongly believe that in the challenging times, profit growth would be constrained and we therefore would recommend tendering to the open offer as the same provides an attractive exit price in the current scenario.

Source : Equity Bulls

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