Record Unilever Bearish Bets Signal Stock Drop: Corporate India

Bearish options bets on Hindustan Unilever Ltd. have climbed to an all-time high after the stock’s surge to a record valuation surpassed even the most optimistic analyst forecasts.

The number of outstanding options giving the right to sell Hindustan Unilever versus those to buy rose to 1.86-to-1 on July 17, the highest level since Bloomberg began compiling the data in 2001. The maker of Dove soaps and Lipton tea is valued at 41 times estimated profit after a 20 percent rally this month sent the shares to 702 rupees, exceeding the price targets of all 33 analysts tracked by Bloomberg and topping the mean estimate by the most ever.

The rally has surprised analysts and investors who sold about 320 million shares for 600 rupees each on July 4 to Unilever, the London- and Rotterdam-based parent of India’s biggest consumer goods producer. While Macquarie Securities India Pvt. says Hindustan Unilever is benefiting from a rural spending boost during the monsoon season and increased investor demand for consumer companies, Quant First Asset Advisors India Ltd. says the shares are overvalued after climbing to a record premium versus the benchmark S&P BSE Sensex index.

“I expect the stock to fall from these levels in the medium to long-term range,” Supreeth S.M., the chief executive officer at Quant First in Bangalore, which manages about $100 million in options, said in an e-mail interview on July 18. “I would advise investors to start booking profits.”

Earnings Outlook

Hindustan Unilever rose 0.7 percent at 10:09 a.m., bound for a record close, while the Sensex climbed 0.8 percent. The Mumbai-based company’s forward price-earnings ratio is the most expensive in the Sensex gauge is almost three times the average multiple of 14 for the measure’s 30 stocks, according to data compiled by Bloomberg.

Unilever, the world’s second-biggest consumer-goods maker, made a public offer in April to increase its stake in Hindustan Unilever to 75 percent from about 52 percent. The parent company said on July 4 that it bought about 192 billion rupees ($3.2 billion) of shares, increasing its stake to 67 percent.

Hindustan Unilever will probably report a first-quarter net income of 8.7 billion rupees on July 26, according to the median of 30 analyst estimates compiled by Bloomberg News. That compares with a net income of 13.3 billion rupees a year ago, which included a one-time gain from sale of property.

Dove Shampoo

India’s slowest economic expansion in a decade may curb demand for Unilever’s premium products, including Dove shampoo and Pears bath soap, said Naveen Vyas, an analyst with Microsec Capital Ltd. who predicted in January that the shares would rally to 676 rupees, the highest price target among analysts tracked by Bloomberg.

Gross domestic product in Asia’s third-biggest economy expanded 5 percent in the year ended March, the weakest pace since 2003. Industrial output unexpectedly declined in May, while car sales dropped for eight straight months through June.

“This is the time to liquidate holdings,” Vyas said in a July 19 phone interview from Kolkata.

The number of Hindustan Unilever puts outstanding has surged about eight-fold during the past three months to 15,326 as of July 19, data compiled by Bloomberg show. That compares with a five-fold increase to 9,556 for call open interest.

Rural Spending

Puts with an exercise level 10 percent below Hindustan Unilever’s share price cost 12.6 points more than calls betting on a 10 percent gain, according to one-month data compiled by Bloomberg. That compares with an average level of 3.6 points for the price relationship known as skew.

Prasad Pradhan, a spokesman for Hindustan Unilever in Mumbai, didn’t reply to e-mail and voice messages seeking comment.

Long-term investors should hold on to Hindustan Unilever shares as rural consumers increase spending, according to Amit Mishra, an analyst at Macquarie Securities India in Mumbai.

Rainfall during the monsoon season, which began June 1 and contributes more than 70 percent of India’s annual showers, is the highest for this time of year since 2001, according to the weather bureau. Agriculture accounts for about 20 percent of the nation’s economy and 55 percent of the cropland doesn’t have access to irrigation, according to the farm ministry.

Overbought Zone

“With a good monsoon we expect some buoyancy in rural demand in the second half,” Mishra said yesterday in a phone interview.

Hindustan Unilever’s stock is overbought and investors should consider selling call options, a trade that benefits from declines in the shares, JPMorgan Chase & Co. wrote in a July 18 report.

The stock’s 14-day relative strength index climbed to 86.8 on July 18, the highest level in almost three years and above the threshold of 70 that signals to technical analysts that the rally may end. The reading was 86.7 at the close yesterday.

Centrum Wealth Management Ltd., which sold Hindustan Unilever shares in the market after the company’s March-quarter earnings, said it has no plans buy back the stock after missing out on this month’s gain.

The company’s price-to-earnings ratio “is highly irrational” when compared to the broader Indian stock market, Chokkalingam G, who oversees 1.4 billion rupees as Centrum Wealth’s chief investment officer, said by phone yesterday. “We will stick to the valuations and not touch the stock.”

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