HSBC downgrades HUL to underweight

Hindustan Unilever
We downgrade HUL from Neutral to Underweight on the back of the recent run up in the stock price.
While the prices of Tide and Rin have been increased by Procter & Gamble and HUL, respectively, the
price increase is much smaller than the price cut taken, i.e. only a small part of the price cut has been
recouped. This, in our view, does not signal the end of competition in the detergents category – other
elements of the mix (ad spends, trade spends, outlet expansion) – all suggest that competitive intensity is
still high. In our view, the increase in stock price of c12% on the back of this news is not justified.
Consensus EPS estimates are not likely to be revised upwards and have fallen continuously to date.
Hindustan Unilever has over 50% of its sales attributed to relatively mature and competitive segments
such as soaps and detergents. Competition even in relatively high growth categories of shampoos, oral
care and skin care is intensifying with international players such as L’Oreal aiming for a bigger share of
the pie. While HUL is attempting to grow in premium categories, the size of HUL will mean that these
categories, even 5 years later, are unlikely to contribute materially.
We believe that HUL will continue to disappoint on profit delivery and a large part of the upmove in the
stock is attributable to PE multiple expansion rather than EPS growth. This expansion in our view is not
justified by underlying fundamentals and hence multiples will contract. We downgrade from Neutral to
Underweight.