Some brokerages feel royalty will impact company in short-term
Shares of Hindustan Unilever fell for the second day after several brokerages and analysts downgraded the stock, after the announcements of its results on Tuesday.
The stock corrected close to 8 per cent in the last two sessions with broking firms such as Edelweiss, Espirito Santo, SBI Capital, Angel Broking, Motilal Oswal and Morgan Stanley reducing HUL’s target price by 15 per cent.
However, analysts at Macquarie Securities have said HUL remains a ‘top pick’ in the domestic FMCG space given the robust growth outlook.
“We remain confident of company’s growth and business strategy and believe short-term impact from royalty hike will get neutralised in the mid-term,” the Macquarie report by Amit Mishra and Priya Ranjan said.
They further said while underlying volume growth was a concern, which was mainly impacted due to the challenging economic environment, royalty increase of 1.75 per cent spread over the next five years was not a concern in the long term. According to the analysts, the royalty increase would put pressure on the margins in the next 5-6 quarters.
They were also optimistic about the margins witnessing an upside by 500 bps as premium range from Unilever’s global portfolio such as Alberto Culver, Sara Lee and TIGI portfolio are expected to enter the Indian market in FY 14.
This would help HUL improve its product offering in alternate channel like salon (high margin) and chemist channel, which is a weak spot.
According to Espirito Santo more than royalty increase, weakening consumer sentiment following high inflation and employment challenges would remain major concerns for HUL and other FMCG players too. The agency said that the increase in royalty payments will impact earnings per share by 3 per cent in FY14 and that the stock will trade long time to rebound.
“They never mentioned about increasing royalty payments in our earlier meetings but had assured that there will be no increase as India is one of the top performing market and does lot of research and development in the country itself,” said Nitin Mathur of Espirito Santo.