Brokers have revised their ratings, estimates and price targets on consumer packaged goods company Hindustan Unilever Ltd after the company’s second quarter results. Most brokers have turned cautious in their outlook and revised down earnings and target prices, only one, Antique Stock Broking, has downgraded significantly by moving their recommendation to ‘HOLD.’ The Q2 miss seems to have tempered sentiment, but expectations of a gradual recovery persist.
Antique downgraded HUL to ‘HOLD’ from ‘BUY’ previously, while also cutting their target price by 10% to Rs 2,685. They reduced FY24/25 estimates by 6%/7% citing “gradual recovery in rural markets and a step-up in competitive intensity.”
Centrum Institutional Research maintained their ‘ADD’ rating but hiked the target price marginally by 0.7%, or Rs 20, to Rs 2,820. They tweaked FY24/25 EPS estimates downwards by 1.6% each.
Nuvama Research cut their target price by Rs 70 to Rs 3,210 post results. They also reduced FY24/25 EPS estimates by 2% each due to “muted growth” in the quarter. However, they maintained their ‘BUY’ rating on expectations of a “gradual recovery in consumer demand.”
JM Financial has not changed its rating, but cut its target price by 0.9% to Rs 2,880 citing risks from “absence of clear volume-trigger.” They noted HUL’s stock may remain under pressure after the weak Q2 performance.
Hindustan Unilever (HUL) reported its Q2FY24 results yesterday, which were largely along expected lines but point to continuing challenges for the FMCG major. HUL’s revenues grew 3.5% to Rs 15,027 crore, while net profit rose 3.9% to Rs 2,717 crore. Volume growth moderated to 2%, indicating rural demand remains subdued.
According to analysts, the quarter saw tepid growth trends continue, especially in rural markets. However, there are early signs of gradual recovery going ahead amid a still difficult environment. Analysts highlighted slowing rural markets, margin gains from lower input costs, and competitive pressures as key factors impacting HUL’s performance and outlook currently.
Demand
Analsts noted that HUL’s Q2 performance was below estimates, with muted revenue, EBITDA and adjusted profit growth on the back of soft 2% volume expansion. HUL management assessed that the demand environment remains similar to the previous quarter, with rural markets showing a gradual improvement while urban areas continue to drive positive momentum.
For the FMCG industry, rural two-year volume CAGR declined 1% during this quarter versus a 4% fall in the previous quarter, as indicated by HUL. Urban markets demonstrated steadier 3% value growth. HUL expects tailwinds from the upcoming festive season and government’s infrastructure spending push to lead to a gradual recovery in rural consumption, although the full impact may take some time to reflect.
Margin Gains on Lower Input Costs Offer Respite
The fall in commodity prices during the quarter came as a boon for HUL’s margins. Gross margins expanded significantly by 692 basis points year-on-year to 52.7%, the highest level in several quarters. Analysts pointed to this as a positive surprise underpinned by reduction in costs of key inputs for HUL.
The expansion in gross margins provides HUL the leeway to drive growth through higher investments in branding and promotion. This is critical at a time when the external environment remains under pressure.
Competitive Intensity
The moderation in input cost inflation has also led to competitive pressures re-emerging, especially from regional players. HUL reported that competition remains intense, with smaller players turning aggressive in categories like detergents and tea where raw material prices have softened.
To counter this, HUL has had to undertake price cuts in soaps, detergents and other portfolios to maintain competitiveness. Analysts pointed out the heightened aggression by regional firms in select categories as inflation recedes.
Category Performance
HUL’s quarterly performance varied across segments. The management indicated that its home care and beauty & personal care divisions saw relatively better growth with mid-single digit volume expansion.
On the other hand, its foods & refreshments segment witnessed a mid-single digit volume decline due to consumers downtrading in tea and weak demand in health foods and beverages portfolio amid elevated milk prices.
In home care, fabric wash and dish wash categories drove growth. Skin care and color cosmetics outperformed in the beauty and personal care division. However, foods & refreshments faced challenges due to high base prices and intense competition.
Cautious Optimism
According to HUL, there are early signs of sequential improvement in rural consumption, although the full impact may take some time. It expects a gradual recovery in volumes going ahead, with margins remaining stable.
Analysts also remain cautiously optimistic about HUL’s prospects in the near to medium term. However, competitive intensity is expected to persist in the coming quarters. HUL will have to continue investing strongly behind brands and volumes to drive growth.
To summarize, HUL’s quarter reflects the larger struggles in the FMCG space currently stemming from rural slowdown and input cost inflation. However, initial signs of recovery, potential to further expand margins, and HUL’s strong capabilities indicate room for cautious optimism. The environment remains challenging, but analysts foresee HUL emerging stronger over the long run.
