Analysts' pick: Hindustan Unilever
20 Sep, 2008.

Hindustan Unilever
CMP: Rs 245.15
Target Price: Rs 277

HSBC Securities has upgraded its rating on the stock to “overweight” saying crude and palm oil prices have weakened in the past few months and since these make up the bulk of material costs for HUL, cost pressures have eased. “Crude oil and palm oil have declined by around 30% in the past 3-4 months. Palm oil is the main input cost in soap manufacture, while crude affects other inputs such as packing materials and LAB (Linear Alkyl Benzene).

We believe that the correction in commodity prices will not be meaningfully reversed in the near term and will impact HUL’s bottom line positively,” a HSBC note said. The brokerage has increased the 2008 (estimated) EPS estimates by 2.9% and 2009(E) EPS by 4.4%.

According to HSBC Securities, the topline growth may slow for the company. “We estimate the topline growth next year will slow to 11.8%, from 18% estimated this year, as volume growth (due to macro-economic slowdown) and price growth (due to heavy price increases taken this year) both moderate from current levels,” the HSBC note said.

However, cooling commodity prices will result in margin expansion, and bottomline growth expected next year at 18.5% will be higher than this year’s 17.1%, the note added.