1. It’s advantage FMCG as global commodity prices slide

It’s advantage FMCG as global commodity prices slide

As global factors add to market volatility since the start of 2015, investors have flocked towards the consumer...

By: | Published: January 13, 2015 12:28 AM

As global factors add to market volatility since the start of 2015, investors have flocked towards the consumer stocks, in the last two weeks.

Although the benchmark Sensex has stayed flat after facing wild swings, the BSE FMCG Index has rallied more than 2% in the last fortnight, thanks to strong price movements observed by stocks like Britannia Industries, Colgate Palmolive, Godrej Consumer Products that have added anywhere between 5-9% in the first eight trading session of the year.

The clear winner however is the Hindustan Unilever stock which has suddenly witnessed a spurt, not only in buying interest from investors but also ratings upgrades by brokerages. The stock which has clocked in a remarkable 18% gains in the period, has also seen as many as seven rating upgrades since January 5. It has toppled HDFC and Sun Pharma, to turn the tenth most valued company with a
market-cap of R1.94 lakh crore.

HUL-stockThe stock seems to have defied price expectations of brokerages like Deutsche, Credit Suisse, Religare Capital Markets and IIFL that have upgraded their outlook in a span of four days and assigned one-year target price of around R900-925. On Tuesday, shares of HUL hit an intraday life-time high of R899.65 before closing the session at R896.65, up R33.15, or 3.84%.

The swift movement in the stock and analysts’ haste to upgrade the stock in early 2015 appears surprising given that both crude oil and palm oil prices had already lost 50% and 20% of their value, respectively, in the second half of 2014. According to Credit Suisse, nearly half of HUL’s input costs are linked to crude derivatives and palm oil.

Besides, tailwinds in the form of lower commodity prices, experts have also based their upgrades on a potential turnaround in volume growth, and the competitive edge HUL is seen enjoying due to its focus on enhanced distribution and increasing its share in premium segments.

“We expect premiumsation to restart as inflation is lower and headroom to advertise is higher. HUL has continued to increase quality and quantity of distribution during the slowdown, which should pay off,” said Credit Suisse in its upgrade note dated January 6, 2015.

Analysts are also optimistic that on the back of lower commodity prices that add to HUL margins, the earnings upgrade cycle may further intensify the earnings outlook on the stock.

JPMorgan and IIFL have raised their earnings estimates for the next two fiscals (FY16,FY17) by (4%,3%I and  (3.6%, 6.9%), respectively in their latest strategy note.

However, given that the FMCG sector as a whole and HUL in particular,  has maintained substantially rich valuations since the last one year, December quarter earnings may provide further clarity for stock selection.

According to Deutsche Bank weak December quarter numbers of HUL could bring a buying opportunity for investors. Currently, HUL is trading at a trailing 12-month price to earnings multiple of 49 times, a 48% premium of its five-year average valuations.

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