HUL Is Losing Foreign Shareholders On High Valuations

(Bloomberg) --

Global investors have cut holdings of Hindustan Unilever Ltd. to a four-year low as the company grapples with weak consumer demand and rising competition.

Foreign funds reduced their ownership of India's largest staples company to 12.7% at the end of March, down from as high as 14.5% in June last year, according to data compiled by Bloomberg. The firm's shares have slumped more than 9% in the past 12 months, the second worst performer in the NSE Nifty 50 Index.

Investors have sold Hindustan Unilever and its consumer-giant peers as they found it hard to justify the expensive valuations of the companies amid faltering sales growth. The firm has been facing competition from new-age brands, while lower agricultural yields have sapped demand among its rural customer base.

“Overseas investors will look at the parent company trading at less than half the valuation multiple,” said Abhay Agarwal, a fund manager at Piper Serica Advisors Pvt. in Mumbai. Revenue growth has slowed significantly and the “three-year sideways movement in the stock during a rising market has brought in some wariness,” he said.

While foreign funds have been selling, the proportion of Hindustan Unilever's shares owned by domestic investors has risen to a record 13.2%, data compiled by Bloomberg show. Parent Unilever Plc and other members of the group own just over 60%, while retail investors have about 12%.

Local investors have to buy the company given its size and weighting in the benchmark index, Piper Serica's Agarwal said.

Read more: Picky Consumers Jilting Big Brands Are Unilever India's New Risk

Still, the decline in Hindustan Unilever shares this year has helped improve its multiples. The stock is currently trading at 46 times its forward earnings, below its five-year average of about 54 times. 

“Consumer stocks focusing on the rural economy could see some positive momentum,” said Souvik Saha, an investment strategist at DSP Asset Managers Pvt. in Mumbai. Commentary from some of the consumer companies are indicating that the worst might be over, and some of key subsidies for the rural areas is set to continue, he said.

Hindustan Unilever is forecast to report net income of 24.7 billion rupees ($296 million) for the three months through March, a decline of 0.9% from a year earlier, according to the median estimate of analysts surveyed by Bloomberg before it announces results Wednesday.

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