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Brokerages bullish on HUL post deal with GSK
The Hindu, December 05, 2018

MUMBAI: Citi says the acquisition will cement HUL’s dominance in the malted beverage segment

A day after India’s biggest consumer goods company Hindustan Unilever Ltd. (HUL) announced the acquisition of brands such as Horlicks and Boost, brokerages have been unanimous in their bullish view on the company.

Global financial majors such as Credit Suisse and CLSA have raised their target price for the stock while Deutsche Bank has raised its recommendation from hold to buy. Citi — and most domestic brokerages as well — believe that the deal would add value to HUL as the company will be able to establish its dominance in the fast-growing, malted beverage segment.

“We view the deal as a clear positive and believe GSK CH’s (GlaxoSmithKline Consumer Healthcare) core brands are highly under leveraged and provide relevant scale, growth potential and profitability to HUL’s current foods and refreshment portfolio,” stated a report by CLSA, which has raised its 12-month target price to Rs. 2,010 from the earlier Rs. 1,750.

On Monday, HUL announced that GlaxoSmithKline Consumer Healthcare (GSK CH) would be merged with the company in an all-equity deal worth Rs. 31,700 crore that would give the former access to strong Health Foods Drink (HFD) brands Horlicks and Boost, alongwith Maltova and Viva.

Credit Suisse has also raised its target price for HUL from Rs. 1,770 to Rs. 1,900 while stating that the deal would make HUL’s food and refreshment business in India 1.6 times larger and give it a strong nutrition brand, which can be leveraged in more categories.

“FY21 will be the first full year of the merger, and we build in half the cost synergies to be realised. We lift FY21 estimated earnings per share by 6.5%, thereby lifting target price to Rs. 1,900 from Rs. 1,770,” it said, while maintaining a neutral rating on account of stretched valuations.

Incidentally, GSK CH is the leader in the HFD segment with over 60% of the market share of which Horlicks alone commands a share of nearly 50%.

Meanwhile, the deal has led Deutsche Bank to upgrade HUL from ‘hold' to buy as it believes that the acquisition would lead to a cumulative gain of around 700 basis points to 800 basis points in the earnings per share in the coming years.

In a similar context, Citi said that even without the synergy benefits, the merger would add around 3.7% to the EPS, in its FY21 estimates for HUL.

Further, with the synergies related to revenue, cost and sales, it could lead to EPS accretion to the tune of around 5.8% to 8%.

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