What should investors do with HUL after its deal with GSK; buy, sell or hold?

Brokerages feel that the deal is likely to be EPS-accretive for HUL and investors who have a time horizon of more than a year can hold the stock with a target placed above Rs 2,000

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Brokerages CLSA and Edelweiss maintained their ‘outperform’ ratings on Hindustan Unilever after it decided to merge GlaxoSmithKline Consumer Healthcare with itself.

The transaction values the total business of GSK Consumer India at Rs 31,700 crore. Following the issue of new HUL shares, Unilever’s holding in HUL will be diluted from 67.2 percent to 61.9 percent and GSK Plc, including group companies, will own 5.7 percent of the merged entity.

The acquisition of GlaxoSmithKline Consumer Healthcare (SKB) by Hindustan Unilever (HUVR) for Rs 31,700 crore will make Hindustan Unilever the largest listed foods company in India.

Brokerages feel that the deal is likely to be EPS-accretive for HUL and investors who have a time horizon of more than a year can hold the stock with a target placed above Rs 2,000.

GSK Consumer Healthcare is the market leader in the HFD (health food drinks) category, with iconic brands such as Horlicks and Boost, and a product portfolio supported by strong nutritional claims.

The GSK Consumer India business delivered a total turnover of around Rs 4,200 crore in the year ended March 2018, primarily through its Horlicks and Boost brands.

Edelweiss maintained its ‘outperform’ rating on HUL, which is also its top sector pick with a target price of Rs 2,030. This translates to gains of a little over 10 percent its closing price on December 3.

The brokerage highlighted that due to the merger — (i) the share of foods and refreshment (F&R) in the company’s revenue pie would jump from 18.4 percent to 27.8 percent; (ii) EBIT margin for the F&R segment would improve from 15.6 percent to 17.8 percent; (iii) EPS would increase 4.5 percent in FY20, without factoring in synergies and cost-savings for HUL.

“With the Health Food Drinks category slated to grow at 9 percent through CY22E and HUVR’s ability to drive penetration coupled with its distribution muscle, we are confident it would clock double-digit revenue growth in SKB’s portfolio in the medium term,” Edelweiss said.

Once the merger is completed, HUL expects the business to grow in double-digits in the medium-term and margins to be accretive to the company after synergy benefits are realised.

“The turnover of our foods and refreshment business will exceed Rs 10,000 crore and we will become one of the largest foods and refreshment businesses in the country,” Sanjiv Mehta, Chairman, and Managing Director, HUL said.

Reacting to the news development, CLSA maintained its outperform rating on HUL and hiked its target price from Rs 1,750 earlier to Rs 2,010.

It views the deal as clear positive for HUL and EPS accretive even without synergy. GSK’s core brands are highly underleveraged. The core brands provide relevant scale, growth potential, and profitability, said the note.

Another brokerage firm, UBS maintained its neutral rating on Hindustan Unilever with a target of Rs 1,800. The deal is EPS accretive despite the exit premium given to GSK shareholders. There are concerns regarding the relevance of Horlicks which may be unwarranted.

Disclaimer:-The views and investment tips expressed by investment experts are their own. Ripples Advisory advises users to check with certified experts before taking any investment decisions.

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