Analysts said the underlying volume growth of 4 per cent reported by the largest maker of soaps in India was a tad underwhelming on a day when Jyothy Labs reported a 15 per cent volume growth for the December quarter. The management’s focus on revenues over margins, though positive for the long-term, could lead to earnings downgrades in the short term, they said, while suggesting that the near-term driver for the stock is missing.
There was something amiss about the quarter’s margin management, which has otherwise long been HUL’s forte, said JM Financial, while expecting a range-bound stock movement in the absence of any significant near-term trigger. The brokerage finds the stock’s worth at Rs 2,420 and advises a ‘hold’ on it.
On Thursday, the stock fell 2.96 per cent to hit a low of Rs 2,319.75 on BSE.
YES Securities did not find the 4 per cent volume growth ‘very exciting’. It said that while the management’s strategy of prioritising growth over margins in the near term is a positive, this could lead to some sort of a cap on margins, thereby leading to some earnings downgrades.
Raw material inflation for tea and skin cleansing products rose for HUL in the quarter gone by. But the FMCG firm chose not to fully pass on the hike to avoid growth disruption and gain shares.
Overall, the company’s operating margin for the quarter stood at 24 per cent, which was 90 basis points lower than the year-ago quarter, reflecting the impact of higher input costs. Analysts had expected the company to report margins of 24.3-25 per cent. Post results, analysts said the FMCG firm looked ready to sacrifice near‐term margins in key categories to retain consumers.
The stock now trades at 50 times FY23 expected earnings, and YES Securities ruled out any further re‐rating in the near‐term. It expects peers like Marico, Nestle India, Tata Consumer and Emami to perform relatively better.
ICICI Securities said the December quarter results did not offer any comments on profitability of nutrition business (mentioned in June and September quarters), which could be a potential risk to margins given foods & refreshment margins down 380 basis points during the quarter on a YoY basis.
Hindustan Unilever’s net profit for the quarter ended December surged 19 per cent on-year to Rs 1,921 crore, while its revenues climbed 20.5 per cent to Rs 11,682 crore.
HUL’s revenues were expected to grow 19 per cent on-year to Rs 11,647.8 crore, while its net profits were seen rising 28.4 per cent to Rs 2,075.2 crore, according to estimates from 12 brokerages polled by ETMarkets.com.
The FMCG company reported a turnover growth of 20 per cent from the year-ago quarter, while its domestic volume growth—excluding the contribution of GSK Consumer products—jumped 7 per cent. Analysts had expected the company to report organic volume growth of 3-5 per cent in the December quarter.
HDFC Securities sees limited scope for rerating on the stock even as it expects a sustained recovery in the discretionary portfolio along with growth acceleration in nutrition portfolio.
“We maintain our EPS estimates for FY21-FY23. We value HUL at 52 times P/E on Mar-23 EPS to derive a target of Rs 2,315,” it said while maintaining a reduce on the stock.