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Why Hemang Jani is gung-ho on HUL despite cautious management outlook

A 100 bps improvement in the margins is extremely positive in the current environment.

ET Now|
Oct 15, 2019, 09.56 AM IST
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HUL can easily deliver 5% to 6% volume growth over the next one year, says Hemang Jani, Senior Vice President, Sharekhan. Excerpts from an interview with ETNOW.

Just analysing the HUL numbers -- the valuation at which the stock quotes beside the commentary that they have made regarding demand pressure in the rural segment of the economy in the near term. But the numbers have been in line and one would say that given the environment, they were actually impressive.
The numbers were pretty much in line with expectations, in fact slightly better on certain parameters. What is most important is that in the current environment where many companies are struggling both in terms of pricing power and volume growth, here is a company which is able to deliver a 5% volume growth and there are more levers in place. The fact that rural consumption is only about 0.5 times urban means that when you see a revival there is going to be enough of support coming through from the rural side.

Also the merger with Glaxo would have some kind of incremental benefits in terms of the margins and the corporate tax rate cut, etc, is quite interesting. A 100 bps improvement in the margins is extremely positive in the current environment. Though we can argue about the high valuations at which it is quoting, in the current environment, people would love to get into story like this and we too have a price target of about Rs 2,250 post the numbers on Unilever.

Management commentary on rural economy not reviving is going to act as a dampener but I like the margin expansion and the improved volumes. HUL is an optimistic management but if an optimistic management talks about negative news or a demand crunch, how would you read that?
We have to understand that despite the rural side not supporting the overall growth, the company managed to deliver 5% growth and at some stage, given the kind of distribution that we have and better monsoon and overall revival that one is looking at, there is no reason why HUL will not be able to show a decent turnaround in rural growth. We have to look at things in a balanced way and overall, the company can easily deliver 5% to 6% volume growth over the next one year. With additional benefits, things are looking quite positive.

IRCTC had a fabulous listing. What next for those who did not get a chance in the IPO. Can they still buy into it?
The pricing of the issue was pretty attractive and the overall float was a bit less and as a result, HNI portion got much oversubscribed. Typically, QIBs tend to buy aggressively on the first day and take away the float and I think that has played an important role in the way the listing happened and the way the spike happened in IRCTC. It is an interesting company and being a government-owned company, there can be debate over how much growth one can really expect but typically when the liquidity of the float is on a lower side with stronger buyers, you might see a spike. One should really avoid buying into it at this point of time. If it is available at say 10-15% correction, one can really look at it.

Markets are taking for granted the moat around IRCTC. But it is a government company and government regulations could change.
Currently what is driving up the stock is that a) there is a very limited set of stocks where there is a growth visibility. Anything which is new and where you are able to see a good amount of growth visibility excites investors.

Business wise, I think it is an interesting business but there is no real case for this kind of valuation or the excitement that we have seen. At some stage, it will kind of stabilise. So, that given the nature of the company and the opportunity but the important controls in terms of pricing, etc, I do not think one can really get too excited at this stage.

Fortis has managed to outperform because there is an open offer at 170 which could kick in. Now that the Yes Bank supply overhang is over, would you like to revisit Fortis as a stock because it is a beaten down stock where the business and management both has changed?
Yes, time and again, we have seen the entire open offer and the fact that there is value because of this parent company being available at a substantial discount to the intrinsic value. But overall, in the current environment, people would want to get into something which is very clean and where you can really take a call for the next two to three years rather than getting into something which appears to have value but you may have some more negatives. I have not looked at Fortis in detail of late, but in the current environment. people would want to buy much better names rather than a controversial one.
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