Analysis of recent happenings in Hindustan Unilever, ONGC & Reliance Petroleum (RPL) by various brokerage houses.
HINDUSTAN UNILEVER
RESEARCH: MORGAN STANLEY
RATING: OVERWEIGHT
CMP: Rs 235
MORGAN Stanley reiterates ‘overweight’ rating on HUL as it believes that investors are likely to be positively surprised by the company’s structural growth story and turnaround in business fundamentals. The FMCG sector is at an inflection point and a sharp reduction in input costs is likely to benefit consumers as well as companies. HUL is not witnessing any exceptional uptrading or downtrading across its product portfolio. Industry volume growth in soaps and laundry is flat due to steep price hikes, but consumers have still been resilient. Revenue growth in FY10 is likely to be lower as it will be largely volume-led. HUL has geared up to respond to volatility in input costs and has shortened its response time and planning cycle.
ONGC
RESEARCH: INDIABULLS
RATING: HOLD
CMP: Rs 655
INDIABULLS has recommended a ‘hold’ rating on ONGC. During Q2 FY09, the company’s standalone net sales increased 12.9% y-o-y to Rs 17,410 crore. While the surge in global crude oil prices and the weakening rupee were expected to drive ONGC’s financials, its performance was dented by the excessive subsidy burden (Rs 12,670 crore) it had to shoulder in order to limit the losses of OMCs. As a result, ONGC’s standalone adjusted net profit declined 5.7% y-o-y to Rs 4,810 crore. Due to the global economic crisis, oil prices have fallen by more than 60% from their peak of $147/bbl in mid-July to the current lows of $50/bbl. This is mainly due to dampening fuel demand from the major consuming nations. The IEA has lowered its oil demand forecasts by 500,000 bopd for the second half of ’08 and by 400,000 bopd for ’09. Thus, with reducing demand, Indiabulls expects oil prices to be under pressure till FY10, thereby adversely affecting the company’s net realisations. However, Indiabulls believes that once the global economy revives, demand for crude oil and natural gas will recover, mainly due to increased demand from developing economies such as India and China.
RELIANCE PETROLEUM
RESEARCH: MERRILL LYNCH
RATING: UNDERPERFORM
CMP: Rs 73
MERRILL Lynch retains ‘underperform’ rating on Reliance Petroleum (RPL). It has steeply cut Singapore complex refining margins forecast for FY10-FY11E. The cut in benchmark refining margins has resulted in a steep cut in RPL’s refining margins, which has led to a 17-47% cut in the company’s FY10-FY11 estimated earnings. RPL’s target price has also been cut by 58% to Rs 59 per share. Merrill Lynch has cut Singapore complex refining margins for FY10-FY1E by 23-41% to $4.2-5.4/bbl. Merrill Lynch expects a global recession, Asian oil demand contraction and large refining capacity addition in FY10E. Asian refining margins have already weakened in Q4 ’08 to $5.9/bbl. RPL’s complex refinery, which enables it to process heavier and cheaper crude, should help it to achieve $4.1-5.5/bbl premium to Singapore margins. RPL’s new target price is now based on EV/EBITDA, as opposed to the discounted cash flow (DCF) method which was used earlier.
Source: Economic Times Investor's Guide
