HUL Q3 Review: Analysts Retain 'Buy' Citing Market Share Gains, Demand Revival Despite Inflation Woes

Hindustan Unilever Ltd.'s stock jumped the most in three months after India's largest consumer goods maker reported a decadal high market share gain in the third quarter on calibrated price hikes even as demand took a beating.

The maker of Dove soaps saw its domestic sales rise 11% over a year earlier in the October-December quarter. Volume growth slowed to 2% due to inflation-led grammage reduction. That suggested 9% price-led growth during the quarter.

The company said there was a 30% increase in the overall material cost basket during the period. It expects higher inflation sequentially in Q4 as well, besides freight inflation and supply-chain disruption.

HUL sees input costs flattening in the second half of 2022, before beginning to taper. That indicates the company may increase prices again in Q4.

Brokerages, too, see inflation as a near-term headwind for HUL but expect the salt-to-soap maker to benefit from cost cuts, a revival in demand, distribution expansion and deepening direct reach. HUL is also well-prepared, with technology and e-commerce strategy, to deal with potentially significant disruptions.

Shares of HUL rose as much as 2.44% in early trade on Friday compared with a 1.07% decline in the Nifty 50. The stock's trading volume was over six times the 30-day average volume at this time of the day.

Of the 39 analysts tracking the company, 32 maintain a 'buy', four recommend a 'hold' and three suggest a 'sell', according to Bloomberg data. The 12-month consensus price target implies an upside of 21.4%.

Here's what brokerages made of HUL's Q3 results:

Edelweiss Securities

• Retains ‘buy’ with a target price of Rs 2,960 apiece.

• Expects improving portfolio mix combined with cost control, price hikes and synergies from the GSK takeover to aid operating margin despite inflationary input prices. The worst of Ebitda margin is behind.

• Demand shift from unorganised to organised should result in additional gains for the company.

• Premiumisation to sustain leading in better earnings growth.

• Rural slowdown is likely transitory. Expects HUL will be a key beneficiary of strong rural demand.

• Maintaining market share will be a key challenge amid increased competition from regional players and several new entrants.

JM Financial

• Upgrades rating to 'buy' with a target price of Rs 2,635 apiece.

• Slowing demand and hyper-inflationary environment notwithstanding, HUL managed to eke out a 99-basis-point improvement in Ebitda margin YoY, with the help of pricing, overheads savings and a rather sharp cut in ad-spends.

• HUL can continue delivering steady financials in turbulent times, akin to what it did in Q3 FY22, even as impending triggers like demand-improvement, commodity costs reversal to mean, GSK synergies take their time to play out.

• The headwinds are all mostly known now — HUL’s bad patch with respect to costs, margin and rural demand are likely already priced in.

• Cut in ad-spends is not really the best of moves but quite understandable at this stage given the hyper costs-inflation and more so since there is no competitor lurking around to take advantage of such a move.

Motilal Oswal

• Maintains 'buy' with a target price of Rs 2,750 as it sees earnings returning to the 15-17% CAGR witnessed in the pre-Covid period.

• Two factors have held back HUL's performance over the past few quarters. First, higher material cost pressures v/s other staples, especially with all its three largest categories (skin cleansing, fabric wash, and beverages) witnessing sharp input cost increases. Second, a slower than expected recovery in the high margin discretionary portfolio.

• Both of these are likely to put pressure on earnings over the next two quarters as well, especially given the steep increase in December 2021 as well as some impact of the third Covid wave in Q4 FY22, albeit temporary, on the discretionary portfolio.

• HUL's operating margin base is favourable for the next three quarters.

• The continued market share gain in 75% of its portfolio is encouraging.

• Any potential increase in government allocations towards the rural sector in the upcoming budget could provide a much needed fillip to demand.

• Given all these factors, valuations at 51.9x/45.3x FY23E/FY24E EPS still leave room for an upside of 22%.