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Valuations no longer defensive; Sell HUL, Nestle; Buy Marico
Stocks pricing in strong growth; stay selective
We downgrade Hindustan Unilever to Sell, while retaining Sell on Nestle, Buy
on Marico. We base our stock selection on: 1) ability to absorb cost inflation, 2)
changes in competitive intensity in key segments, and 3) exposure to
categories with low penetration and hence higher growth potential. We believe
current valuations are factoring in strong earnings growth, despite limited
visibility on further earnings upgrades. With immediate effect, we transfer
coverage of Hindustan Unilever (HLL.BO), ITC (ITC.BO), Nestle India (NEST.BO)
and Colgate-Palmolive India (COLG.BO) to Puneet Jain, while Aditya Soman
continues to cover Marico (MRCO.BO) and Dabur (DABU.BO).
Stocks trading 1-SD above one-year fwd P/E; returns losing steam
We believe valuations on a one-year forward P/E are stretched, with the sector
trading over 1-SD above its long-term mean. Relative to MSCI India, the sector
is trading at a premium of more than 89%, the highest since early-2004 (except
for a brief period between Oct 2008-Feb 2009, when broader markets corrected
sharply). While multiples have expanded, we believe CROCI has peaked as we
expect GCI to rise at 23% CAGR between FY11-FY13E vs. 10% in FY04-FY11.
Downgrade HUL to Sell; maintain Sell on Nestle, Buy on Marico
HUL: Post recent outperformance (HUL has outperformed Sensex by 19%
since April 1, 2011), we believe the stock is pricing in a strong margin rebound.
We believe persistent cost inflation on account of rising crude prices and high
competitive intensity will cap margins over medium term. Nestle India: Nestle
is trading at 1-yr fwd P/E of 36X vs. 3-yr avg. of 28X. The stock is pricing in FCF
growth of 19% for FY11-FY25E (terminal growth of 4%) vs. 14% in FY06-FY11.
Marico: We see international business driving near-term growth while
domestic volume growth will likely pick up in 2HFY12 as raw material prices
stabilize. Stock is relatively inexpensive at FY13E P/E of 21.8X vs. sector avg. of
25.0X. We maintain Neutral on ITC, Dabur India, and Colgate India. We revise
our FY12E/FY13E EPS by -18% to +10% for Indian consumer stocks under our
coverage and introduce FY14E estimates. We roll forward our valuation basis
to FY13E EPS and consequently raise our 12-m TPs by up to 32%.
Key risks
Key risks include easing of input cost inflation, lower competitive intensity,
continued fiscal stimulus, increase in tax incidence through implementation
of GST, and sustained crude-led input price inflation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Valuations no longer defensive; Sell HUL, Nestle; Buy Marico
Stocks pricing in strong growth; stay selective
We downgrade Hindustan Unilever to Sell, while retaining Sell on Nestle, Buy
on Marico. We base our stock selection on: 1) ability to absorb cost inflation, 2)
changes in competitive intensity in key segments, and 3) exposure to
categories with low penetration and hence higher growth potential. We believe
current valuations are factoring in strong earnings growth, despite limited
visibility on further earnings upgrades. With immediate effect, we transfer
coverage of Hindustan Unilever (HLL.BO), ITC (ITC.BO), Nestle India (NEST.BO)
and Colgate-Palmolive India (COLG.BO) to Puneet Jain, while Aditya Soman
continues to cover Marico (MRCO.BO) and Dabur (DABU.BO).
Stocks trading 1-SD above one-year fwd P/E; returns losing steam
We believe valuations on a one-year forward P/E are stretched, with the sector
trading over 1-SD above its long-term mean. Relative to MSCI India, the sector
is trading at a premium of more than 89%, the highest since early-2004 (except
for a brief period between Oct 2008-Feb 2009, when broader markets corrected
sharply). While multiples have expanded, we believe CROCI has peaked as we
expect GCI to rise at 23% CAGR between FY11-FY13E vs. 10% in FY04-FY11.
Downgrade HUL to Sell; maintain Sell on Nestle, Buy on Marico
HUL: Post recent outperformance (HUL has outperformed Sensex by 19%
since April 1, 2011), we believe the stock is pricing in a strong margin rebound.
We believe persistent cost inflation on account of rising crude prices and high
competitive intensity will cap margins over medium term. Nestle India: Nestle
is trading at 1-yr fwd P/E of 36X vs. 3-yr avg. of 28X. The stock is pricing in FCF
growth of 19% for FY11-FY25E (terminal growth of 4%) vs. 14% in FY06-FY11.
Marico: We see international business driving near-term growth while
domestic volume growth will likely pick up in 2HFY12 as raw material prices
stabilize. Stock is relatively inexpensive at FY13E P/E of 21.8X vs. sector avg. of
25.0X. We maintain Neutral on ITC, Dabur India, and Colgate India. We revise
our FY12E/FY13E EPS by -18% to +10% for Indian consumer stocks under our
coverage and introduce FY14E estimates. We roll forward our valuation basis
to FY13E EPS and consequently raise our 12-m TPs by up to 32%.
Key risks
Key risks include easing of input cost inflation, lower competitive intensity,
continued fiscal stimulus, increase in tax incidence through implementation
of GST, and sustained crude-led input price inflation.
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