Multiple near-term worries likely to keep HUL stock under pressure

A YoY fall in volumes in the March quarter would be a first in seven quarters

There are multiple near-term worries for the stock of India's largest listed consumer company, Hindustan Unilever (HUL). While inflationary pressures will weigh on its profitability, demand pressures especially in the rural market are expected to hit its revenues. This has led brokerages to cut the earnings estimates for FY23 by 7-10 per cent. The demand/margin woes have led to a 15 per cent correction in the stock price from its highs in February.

The industry demand situation has deteriorated sequentially given consecutive price hikes. According to Nielsen, categories where HUL is present have reported flat sales (by value) and single digit decline in volumes in January and February this year as compared to the same period last year. Volumes for the market leader could fall by 2.5 per cent YoY, a first in seven quarters.

HUL’s value growth in the December quarter was at 11 per cent outperforming the market growth which was in mid-single digits. Similarly, HUL’s volume growth was up 2 per cent y-o-y while market’s volume growth was down in low single digits.

Analysts led by Amnish Aggarwal of Prabhudas Lilladher Research have FY23 earnings estimates for HUL by 8.2 per cent given deepening rural and urban slowdown and margin hit in H1FY23 due to commodity impact of the ongoing Ukraine-Russia crisis. The brokerage believes that overall inflation led by higher food and fuel prices could impact demand over the medium term.

While brokerages acknowledge near term challenges, they are positive on the prospects of the market leader. Say Mihir P Shah and Abhishek Mathur of Nomura Research, “We expect HUL’s core categories to be relatively resilient and the price-value equation of products to continue to tilt towards organised companies leading to market share gains in an inflationary environment.” They also highlight that the market leader will benefit from demand uncoiling in out-of-home categories and support volumes as mobility increases with educational institutions and offices opening up.

The other news trigger which could have bearing on the stock price are reports that it is in talks with spice major MDH for a majority stake. The acquisition of MDH which has a stronger base in North India, will mark the entry of HUL into the Rs 24,000 crore organised spice market. Avendus Research expects this maket to more than double to Rs 50,000 crore by 2025 registering a compounded annual growth rate of 16 per cent.

In addition to strong growth rates, the gross margins of the business is healthy at 35-45 per cent. This could boost the overall margin profile of HUL. Given the large market size and growth prospects, HUL is expected to pay a premium for the acquisition valued at upwards of 10 times MDH’s FY21 sales of about Rs 1,200 crore or Rs 10,000 crore to Rs 15,000 crore.

At the current price, the stock is trading at about 49 times its FY23 earnings estimates. Given the demand scenario and the uncertainty on the MDH deal front, investors should await clarity on the same before considering the stock.