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    Royalty hike clouds HUL's strong Q3 results; should you buy, sell or hold the stock now?

    Synopsis

    Global investment bank, Jefferies maintained its buy rating on HUL post Q3 results but slashed its target price to Rs 3100 from Rs 3150 earlier which still translates into an upside of about 17% from Rs 2650 recorded on 19 January.

    Royalty hike clouds HUL's strong Q3 results; should you buy, sell or hold the stock now?ETMarkets.com
    Brokerage firms retained their ratings on Hindustan Unilever (HUL) post the December quarter results, but global investment bank Jefferies slashed its 12-month target price.

    Most of the other domestic brokerage firms see a marginal upside for HUL post results amid an increase in royalty and central service fees (by 80bps).

    Reacting to the results, HUL stock price fell by about 3% on Friday to trade below Rs 2600 levels in the first hour of trade.

    The royalty is set to increase by 80 basis points (0.8 percentage points) in a staggered way from 2.65% of revenue to 3.45% over a period of three years.

    HUL on Thursday reported a standalone net profit of Rs 2,505 crore for the December quarter, up 12% over the corresponding period of last year. The company had posted a profit of Rs 2,243 crore in the last year period. Also Read

    HUL flagged moderation in inflation during the quarter under review, albeit it remained high when compared with the previous year period.

    Global investment bank, Jefferies maintained its buy rating on HUL post Q3 results but slashed its target price to Rs 3100 from Rs 3150 earlier which still translates into an upside of about 17% from Rs 2650 recorded on 19 January.

    “At the concall, HUL clarified that requisite regulatory approvals will be taken for royalty hike (80bps over 3Y). The management justified the increase based on benefits enjoyed by HUL and a detailed study & benchmarking was done to arrive at the revised rates,” the note added.

    “Our industry interactions indicate HUL will likely need approval from minority shareholders. Overall 3Q was in-line while volume growth was ahead and home-care continues to outperform,” it said.

    We have collated views from different brokerage firms on HUL post the December quarter results:

    Prabhudas Lilladher: Accumulate| Target Rs 2798
    “The quarter saw sequential margin improvement with inflation moderating QoQ. Inflation still remains elevated YoY which led to a sharp gross margin slippage of 463bps YoY to 47.5%,” Amnish Aggarwal – Head of Research, Prabhudas Lilladher Pvt Ltd, said.

    EBITDA margins at 23.2% were managed due to a cut in employee expenses (58bps), ad spends (120bps) and lower other expenses (103bps).

    “Royalty agreement with Parent Unilever is set to increase from 2.65% to 3.45% (+80bps) over a 3-year period would be front-ended which adds to margin pressure in the near term. Royalty increase will impact EPS by 2-2.8% for FY24 and FY25.

    We have an Accumulate rating on the stock with a target of Rs 2798,” he said.

    ICICI Securities on HUL: ADD| Target Rs 2850
    ICICI Securities retained its ADD rating on HUL post Q3 results with a target price of Rs 2850.

    HUL’s 3Q results met consensus expectations, however, the increase in royalty and central service fees (by 80bps) has been a dampener. Overall impact on operating margins shall be offset with mix-improvement (premiumisation) and scale benefits.

    Market share gains in fabric wash (both in value and volume) and HFD (despite of milk-inflation) have been encouraging.

    “We upgrade our earnings estimates by ~3% for FY24E; modelling revenue/EBITDA/PAT CAGR of 13/14/15 (%) over FY22-24E,” said the note.

    “Key downside risks are delayed recovery in demand, sustained raw material inflation and irrational competition,” it said.

    Kotak Institutional Equities on HUL: ADD| Target Rs 2825
    Kotak Institutional Equities maintained its ADD rating on HUL post the December quarter results with a target of Rs 2825.

    Hindustan Unilever reported a 5%/16% YoY volume/value growth (3-yr CAGR of 3.7%/11.6%). Easing RM prices (palm oil/crude oil) and the likely bottoming out of rural slowdown set the stage for robust GM recovery starting in 4Q and some pick-up in volume growth.

    “Increase in royalty by 80 bps to 3.45% in the next 2-3 years and termination of GSK-CH OTC products distribution contract drive 2-3% EPS cut. We roll over and maintain FV at Rs 2,825 (50X FY2025E PE),” said the note.

    (Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)



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    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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