Buyback unlikely to be EPS accretive…

HUL today announced that it will consider share buyback in its Board meeting on 29th July. Assuming it buys back 25% of its network (maximum permissible limit) i.e. 1.5% of its shares outstanding, at today’s price of Rs 194, we estimate it would be EPS neutral. And it would increase Unilever’s stake by 2.2% to 53.2%.

And fundamentals unlikely to change

Key issues affecting the company are stiff competition, steep input cost increases, lack of pricing power and unexciting volume growth owing to high penetration in its key household and personal care products. We do not see any of these issues changing as a result of possible share buyback.

Near term upside likely, fundamentally sell

However we think the market is likely to read this as a signaling event and the stock may run near term. We believe a buyback will possibly lead to a higher “floor” price, a better clarity on which should be available post announcement of buyback price in the Board meeting on 29th July. Notwithstanding the potential near term upside, from a fundamental perspective we see risk to earnings and hence retain our Sell recommendation.