HUL Q2 Review: Analysts Predict Near-Term Headwinds Amid Rural Demand, Inflation Worries

Hindustan Unilever Ltd.'s management is "cautiously optimistic" about the demand recovery after volume growth fell in the second quarter ended September. It also flagged input cost inflation.

India's largest consumer goods company's domestic sales rose 11% over a year earlier in the July-September quarter. Volumes, however, grew 4% against the estimated 5-7%. That suggests a 7% price-led growth during the quarter.

The company expects inflationary pressures to persist in the near term, impacting gross margins. Brokerages, too, see hyperinflation and rural slowdown to be near-term headwinds but foresee a stronger performance.

Shares of HUL rose 1.5% in early trading on Wednesday. The stock closed 4% lower on Tuesday after the company announced quarterly results.

Of the 40 analysts tracking the stock, 32 suggest 'buy', six recommend 'hold' and two have a 'sell' rating. The average of price targets compiled by Bloomberg implies an upside of 14%.

Here’s what brokerages have to say about HUL’s second-quarter performance:

Emkay

• Maintains ‘hold’ rating with a target price of Rs 2,700 per share.

• Factoring in lower margins and other income, it reduces FY22-24E earnings per share by 4%.

• Valuations at 58x FY23E and 51x FY24E earnings per share appear unattractive given the muted near-term earnings outlook.

• The recovery in premium discretionary categories is expected to benefit margins, but overall input cost pressures are rising and are likely to restrict gains in the near term.

• The rural market has seen a moderation as per Nielsen, which HUL believes is transient. However, this could be a risk to growth and may drive further downside in the future.

• The recovery in the higher margin discretionary portfolio will be positive. But with rising inflation, margin pressure is expected to continue, offering limited room for gains ahead.

Edelweiss

• Retains ‘buy’ rating but lowered target price to Rs 2,960 given the miss on volume growth.

• An improving portfolio mix combined with cost control, price hikes and synergies from the GSK takeover should aid Ebitda margin despite inflationary input prices.

• Key laggards in volume growth were hygiene products, sanitisers, food and tea, either due to high base or sharp price hikes.

• Digital-first beauty brands are seeing good traction. More than 15% of demand is captured digitally.

• The company will outgrow the market. The brokerage is positive on its pricing power underpinned by distribution expansion, deepening direct reach and product innovation.

• Key risks include a spike in ad spends due to increased competition from regional players. Maintaining market share will also be a challenge for HUL. Besides, the price war in HUL’s popular segments with new entrants entering the fray could hit the company hard.

Motilal Oswal

• Maintains 'buy’ rating on the stock.

• HUL’s share of the discretionary and out-of-home portfolios (15% of sales) is higher than peers. Moreover, these businesses have much higher margins than the rest of the portfolio. As a result, the earnings growth outlook from second half of FY22 is incrementally better vs peers.

• Sachets (priced at Rs 2, now launched across South India) and access packs are doing very well. The benefits of higher penetration of these products would be seen over the longer term.

• HUL to be a key beneficiary of revival in discretionary spends.

• High raw material prices may continue to pressure gross margins.

• HUL’s earnings growth has gained impetus in recent years (before Covid-19 affected FY21). It reported a 18% EPS compound annual growth rate in the four years ended FY20. This is particularly impressive given the weak mid-single-digit earnings growth posted by (much smaller) peers in recent years.

Dolat Capital

• Maintains ‘accumulate’ rating with a target price of Rs 2,890 per share after valuing the stock at 56x FY24E EPS. This means that the total returns on the stock would be between 10-20%.

• Forecasts its FY22/FY23/24E EPS to Rs 38.3/43.9/49.4 as revenue performance was in line with its estimates.

• During Q2 FY22, the core portfolio exhibited 11% growth despite an unfavorable base of 16% growth in Q2 FY21. Rural markets will remain under pressure at least till the next crop season.

• Revenue growth would remain in the low double digit considering: (1) increasing penetration of GSK portfolio (2) expected normalisation of discretionary and out of home portfolio and (3) regain in strength in rural markets.

• Margins would improve with the normalisation of growth in discretionary and GSK portfolio.

• HUL has stepped up its digital presence through the dedicated direct-to-consumer platforms for four of its premium brands: Dermalogica, Lakme, Simple and Love, Beauty and Planet. Lakme, in fact, witnessed 30% of its sales being generated through digital.

Prabhudas Lilladher

• Retains ‘accumulate’ rating on stock but with a higher target price of Rs 2,930 on a discounted cash flow basis.

• It expects 10.9% sales and 15% profit after tax CAGR over FY22-23.

• The brokerage slashed FY22/23 EPS by 1.9%/0.2% on the back of inflationary environment and slowdown witnessed in rural demand but neutralised partly by uptick in discretionary segments.

• Discretionary segment remains below 2019 levels while out-of-home has rebounded strongly.

• HUL will face margin pressures in the near term.

• Initiatives taken in the nutrition segment should play out over the medium term offering growth momentum. Already 85% of the integration process for nutrition business has been completed.

Phillip Capital

• Maintains 'buy' rating with a target price of Rs 3,050 per share.

• A broad-based slowdown was witnessed across key segments when looked at from a two-year CAGR perspective. It resulted in lower volume growth of 4% as against its expectation of 7%. Another reason was transient integration issues in merging GSK consumer distribution network with HUL.

• The brokerage expects out-of-home/discretionary portfolio (15-20% of business) to see substantial pick-up from the second half of FY22.

• HUL to start reporting extremely strong performance from Q4 FY22 onwards.

• Struggling brands Lifebuoy and Lux, which have been on a steady decline in terms of market share, have found new growth vectors to revive growth.

• Shikhar app is adopted by 6.5 lakh outlets, which are predominantly
  in urban and semi-urban areas. Going forward, there will be a growth in rural areas as well.