Merrill Lynch Downgrades HLL

Mumbai, June 25: | Updated: Jul 26 2002, 05:30am hrs
Fast moving consumer goods (FMCG) major Hindustan Lever Ltd (HLL) has been downgraded by Merrill Lynch. In its latest report, Merril Lynch has said, over the past few months, it has been disappointed with HLL’s performance — driven by lack of significant pick-up in demand and increased competitive pressures.

The report states Merrill Lynch had been positive on HLL, because of expected recovery in consumer demand and also easing of competitive pressures. “Going forward, we believe rural recovery will likely be further delayed on the back of poor monsoons,” it said. Merrill Lynch has cut the turnover estimates and reduced its earnings forecasts for HLL by 2.2 per cent in 2002 and five per cent in 2003. “Dull earnings growth coupled with poor monsoons further diminishing earnings upside, at least in the medium term, leads us to downgrade our intermediate term recommendation to neutral,” it justified.

While Merrill Lynch has maintained its view that HLL is a high quality company, however, with tougher business environment and a substantial 137 per cent premium to the Sensex, it believes that the stock will continue to underperform, despite it already having underperformed by 10 per cent in the past six months. On Thursday, the HLL stock on BSE closed at Rs 182.30, a drop of Rs 1.05 compared to its previous close.

The report noted that while competitive pressures remain stiff, the onslaught of low priced regional competition continues. It is believed that competitive pressures for HLL will remain relatively high, with recovery in consumer demand likely to be pushed further due to poor monsoons.

HLL reported a domestic sales growth of 1.7 per cent in the second quarter ended June 30, 2002, which is a higher growth level as compared to the corresponding quarter last year. This came largely on the back of a good winter crop. The turnaround was also aided by product relaunches especially in the case of soaps.

HLL derives over 40 per cent of its turnover from the rural market. Key to rural economy growth is good monsoons, as only 25 per cent of the cultivated agricultural land has irrigation facilities.