Hindustan Unilever Q3 Review: Shares Fall As Analysts Raise Caution On Surprise Royalty Hike
Easing inflation and green shoots of rural recovery prompted analysts to retain 'buy' on HUL.
Shares of Hindustan Unilever Ltd. fell after the surprise hike in royalty fees, which may put pressure on the company's margins, according to some analysts.
However, easing inflation and green shoots of rural recovery prompted analysts to retain 'buy' as the company continues to grow ahead of market expectations.
The Dove soap maker's profit rose 8% year-on-year to Rs 2,474 crore and revenue jumped 16% to Rs 15,597 crore for the quarter ended December, in line with estimates. Volumes grew 5% at a time when the fast-moving consumer goods sector has seen a dip in volumes in the reported quarter.
HUL's gross margins expanded 170 basis points quarter-on-quarter after declining for three quarters as inflation in the input basket decelerated to 18% YoY (versus 22% in Q2), led by lower palm and crude oil prices.
However, a part of the gross margin recovery was re-invested in ad spends, with operating margin expansion limited to 30 basis points quarter-on-quarter. On a year-on-year basis, however, the Ebitda margin contracted due to high inflation.
The company's management indicated that the worst is over in terms of inflation as well as the rural slowdown, and the country's largest consumer goods maker will be a clear beneficiary on both fronts.
On the hike in royalties to its parent Unilever Plc, the management justified the new rates based on the benefits it enjoys and said that the changes are included in the company’s double-digit EPS growth targets for the medium to long term announced during the investor day on Nov. 22.
Analysts, however, said that the increase could marginally pressurise HUL's operating margins in the coming quarters.
Shares of the company declined 2.87% to Rs 2,573.80 apiece as of 10:44 a.m., while the benchmark Nifty 50 gained 0.20%.
Of the 42 analysts tracking the company, 31 maintain a ‘buy’, nine suggest a ‘hold’ and two recommend 'sell', according to Bloomberg data. The average of the 12-month target prices implies an upside of 12.1%.
Here's what brokerages have to say about HUL's Q3 FY23 results:
Jefferies
Retains 'buy' rating with a target price of Rs 3,100 apiece, implying a potential upside of 15%.
The key positives include continued strong volume traction in in-home care despite price increases, double-digit growth of Glow & Lovely after a weaker performance in the previous quarters, recovery in the HFD portfolio with mid-single-digit growth despite input costs being an issue, and mid-single-digit volume growth in tea.
While the few negatives include BPC margins remaining flat QoQ despite lower palm prices and the seasonal benefit of the winter portfolio, food and refreshments margins also dipped sharply QoQ.
The brokerage slightly lowered its EPS estimates to factor in higher royalty rates and the discontinuation of the distribution agreement with GSK post-Nov. 23.
Motilal Oswal
Maintains 'buy' rating with an unchanged target price of Rs 3,100 apiece, implying an upside of 17%.
Given the rural recovery and commodity cost reductions, the brokerage expects HUL earnings growth trajectory to get back to the mid-to-high teens that it exhibited for the four years before Covid.
The brokerage is unconcerned about the royalty increase if HUL receives comparable benefits from its parent. The decision also requires a majority of minority shareholders’ approval, so there is no risk as of now, it said.
The strong execution of its winning in many Indian strategies has meant that growth in central India is 1.5 times that of base growth. Its execution strategies for herbal products and the recent acquisition of GSKCH have been remarkable feats.
Dolat Capital
Upgrades to 'accumulate' rating with a target price of Rs 2900 per share with a potential upside of 10%.
Though it remains optimistic on rural recovery and gross margin improvement, the current market price does not support 'buy' rating.
Personal care segment reported a mere 11% revenue growth due to delayed monsoon. The brokerage believes that the segment would bounce back in Q4.
Recent softening in select commodity prices is likely to benefit HUL in the ensuing quarters.
But increase in royalty would pressurize EBITDA margins, going ahead.
Royalty expenses for HUL at 3.45% are still lower than Nestle's 4.5%, P&G's 5% and Colgate 5%
Nirmal Bang
Retains 'buy' rating with a target price of Rs 3065 apiece, implying a potential upside of 15.7%.
The brokerage remains hopeful of a better growth environment in Q4 FY23 and FY24, along with a sequential margin improvement as net material inflation is expected to fall further in Q4 FY23 vs Q3 FY23.
There is 2.2%/0.8%/0.1% upward revision in its estimates for FY23/FY24/FY25, as the company bakes in slightly higher revenues.
Stable input costs beyond the near term, a partial reversal of price hikes taken in the last two years, mix improvement, synergy benefits from the nutrition portfolio and continued cost-saving initiatives are some of the catalysts that should offset the increase in key other operating costs like advertising and promotion spends, etc., which have seen a sharp cut in the last two years.