The winner's curse: Even in the current stock environment, HUL is amongst the very few stocks that have managed to not just withstand value erosion but also give decent returns on an annualised basis. But this very strength of the company has now started looking like a weakness. In other words, while other index stocks have witnessed huge contraction in their valuation multiples, HUL has actually gone on to expand the same. This has resulted in the risk reward ratio of HUL becoming unfavorable, especially against the backdrop of vastly reduced valuations at some of the other companies. Investors should note that we are positive about the growth prospects of the company in the domestic markets. More importantly, we are enthused on the company's recent restructuring activities and foray into the still nascent foods and water businesses. However, the valuations, not just relative but also on a standalone basis are looking stretched from a medium term perspective. In light of these observations, we recommend a SELL on the stock.
Kansai Nerolac Paints Limited--BUY
At the current price of Rs 490 the stock is trading at an attractive multiple of 7.6 times our estimated FY11 earnings. Keeping in mind the company's strong presence in the industrial paints segment, strong return ratios and future growth prospects, we recommend a 'BUY' on the stock with a target price of Rs 965 from an FY11 perspective, implying a compounded annual return of 31%.