Why HUL Has Limited Triggers To Beat Peers
The maker of Surf Excel trades at a premium even as it has underperformed peers and the FMCG benchmark.
India's largest consumer goods maker, Hindustan Unilever Ltd., has been among the favourite picks in the fast-moving consumer goods sector. Yet, it has lagged peers in the past year. Analysts say upside may still be capped with limited triggers in the near term.
Shares of the Surf Excel maker fell 1.7% in the past year. By comparison, the NSE FMCG index has returned 20% gains, outperforming the benchmark Nifty 50's 9% rise. By comparison, ITC has gained 36%, Nestle India has jumped 22.6% and Britannia Industries is up 21.42% in the last one year, while Tata Consumer Products Ltd. has rallied 28% in the last six months to hit a new all-time high of Rs 928 apiece on NSE on Oct. 17.
And yet, HUL trades at a premium at 58.42 times its profit compared with the average price-to-earnings multiple of 46.35 of the FMCG sector. And its multiples are higher than that of most peers.
While HUL has been fundamentally strong over the past few decades, a high inflationary environment coupled with weak demand narrowed its operating margin, impacting the return on equity this year. According to analysts, the consumer goods maker's return on capital employed—a measure of how efficiently a company utilises all available capital to generate additional profit—has suffered. HUL's earnings has been the most impacted among peers due to its over-indexed discretionary portfolio.
The sustained weakness in rural and inflation will continue to influence the company’s earnings at least for this fiscal, said analysts.
Growth Bump
HUL's volume has remained under pressure in at least the last eight quarters, and growth ranged 3% to 5% in the past year. Most analysts who track India's largest consumer goods maker expect it to grow 4% in the second quarter ended September.
And they see a mid-single-digit revenue growth. Pricing-led growth will taper off, while operating margin is expected to see only a gradual improvement on the back of aggressive spending on advertisements and promotions, with media intensity now back to pre-Covid levels.
"We expect pricing growth to be 0.5% year-on-year due to price reductions in soaps, shampoos and laundry, and some pricing in tea, HFD (health food drink) and coffee," said Nuvama Institutional Equities' Executive Director Abneesh Roy. The company's volumes are likely to grow only in specific categories where prices have been reduced, he said.
Numava estimates HUL's revenue, Ebitda and net profit to increase 4.5%, 7% and 2.9%, respectively, over the previous year in Q2. It also expects the Dove soap maker's Ebitda margin to expand merely 56 basis points to 23.8%, with ad spends likely to be around 9.8% of sales.
Barring HUL, Nitin Gupta of Emkay Research expects healthy Ebitda growth for FMCG companies on the back of a sharp recovery in gross margin. While the brokerage has a "hold" on HUL, it lowered the target price to Rs 2,800 apiece, implying a potential upside of 14%.
"Destocking in trade is likely due to further price cuts," said Gupta. The rural market that was expected to see a gradual expansion in the second quarter, following a recovery in the first quarter on a low base, is likely to disappoint, he said, estimating the volume growth in Q2 at 4%.
Emkay lowered its earnings per share estimates for HUL by 3-5% for FY24 to FY26.
Jefferies expects Nestle India, Tata Consumer Products and Varun Beverages Ltd. to report double-digit revenue growth, while forecasting HUL's top line to expand less than 5% in the September quarter.
Goldman Sachs expects HUL's volume and margin trends to continue trail that of peers throughout FY24. It cut FY24-FY26 EPS estimates by 1% to 2%, to factor in the slow pace of growth.
Early commentary from FMCG companies suggest not much traction so far in the rural market due to food inflation and volatile monsoon. HUL said competitive intensity has gone up, especially in tea and detergent bars, due to many small players operating in this space.
Roy of Nuvama sees a gradual recovery in HUL's volumes after the second half ending March 2024.
Of the 43 analysts tracking HUL, 27 have a "buy", 13 suggest a "hold" and three recommend a "sell", according to Bloomberg data. The average of 12-month price target implies an upside of 12.6%.
The relative strength index of HUL stock stands at 59.8, signalling it is trading neither in the overbought zone nor in the oversold zone. RSI below 30 is considered oversold and above 70 overbought.
The HUL stock has a one-year beta of 0.5, implying very low volatility. Its shares are trading lower than 100-day, 150-day and 200-day moving averages.
