Disappointed by a lower-than-expected volume growth in the December quarter of around 5% and the company's decision to increase royalty payment to parent company Unilever to 3.15% of sales by 2018, most analysts downgraded the Hindustan Unilver on Wednesday. The consumer goods major lost ground for a second day after a dozen downgrades by brokerages including Credit Suisse, CLSA, Morgan Stanley, Nomura, IDFC and Edelweiss. Analysts pared their target prices by anywhere between 15% and 23%.
After falling nearly 7% in the early trade, HUL share closed the trading session at R460.2, down 4% or R21, its biggest intra-day fall in nearly two years. Earlier on Tuesday, the stock lost 3% as the third quarter numbers failed to please the street.
Leading brokerages reduced their rating on the stock citing the hike in royalty payment and an expected rise in tax rates as negatives. The December quarter volume growth that fell to its lowest in three years raised concerns of a lack of future growth driver for the company.
Morgan Stanley wrote HUL's earnings upgrade cycle has peaked and that rise in royalty payment is a likely de-rating catalyst for the stock. the brokerage expected sharp increase in the tax rate of about 700 basis points (bps) till fiscal 2015 that could result in muted earnings growth in the period.
On Tuesday, HUL announced a phased-in rise in royalty rates to be paid to Unilever that owns 52% in the Indian arm from 1.4% of net sales currently to 3.15% by 2017-2018. The increase in fiscal 2014 alone is 50bps, and the rate increase progressively over the next few years.
For the three months to December, HUL reported a 10% y-o-y growth in its revenues to R6,434 crore while net earnings grew 8% to R871 crore. Owing to a slowdown in the discretionary segment of personal care and foods, the volume growth however grew at 5% as against consensus estimate of about 8%.
According to a note by IDFC Institutional Securities, Hul may find it harder to achieve relevant volume growth in the long-term as the new product pipeline is capped to 'Unilever' categories, preventing 'Indianisation'.