HUL better placed to fight inflation; negatives priced-in stock: Analysts

Hindustan Unilever (HUL) shares surged the most in seven weeks, up 4 per cent to Rs 2,230 apiece on the BSE in Thursday’s intra-day trade, after the fast-moving consumer goods (FMCG) company reported in-line result for the March quarter (Q4FY22).

While analysts see near-term margin compression, on expected lines, due to rise in commodity prices, they believe HUL is relatively better placed to fight the inflation woes.

Edelweiss Securities is positive on HUL's ability to outgrow the market, as well as its pricing power underpinned by distribution expansion, deepening direct reach and product innovation initiatives.

“Although inflationary raw materials may continue to impact gross margin in the near term; going forward, we expect cost-saving initiatives such as zero-based budgeting, efficiency in ad spends and changes in route-to-market to help,” it said in its result review report.

The country’s largest FMCG major’s annual turnover crossed the Rs 50,000 crore-mark in Q4FY22. Its net profit rose 5.4 per cent year-on-year (YoY) to Rs 2,304 crore, while revenue rose 10.7 per cent YoY to Rs 13,767 crore in Q4.

The company’s volume growth was flat in the quarter compared with a contraction of 8 per cent for the industry.

On the margin front, Home care margin contracted 140 basis points YoY to 19.8 per cent, Personal care margin contracted 130bp YoY to 26.2 per cent, while Food & Refreshment margin expanded 290bp YoY to 19.3 per cent. Overall, gross margin contracted 300bp YoY to 49.5 per cent. (est. 50.1%).

Moreover, as a percentage of sales, lower operating expenses (down 40bp YoY to 11.8 per cent), ad spends (down 210bp YoY to 9.6 per cent), and staff cost (down 30bp YoY to 4 per cent) led to EBITDA margin contraction of just 30bp YoY to 24.1 per cent.

That said, the management believes the company may see higher sequential material cost inflation in the next two-three quarters.

“Margins will decline in the short term as price versus cost gap increases. However, we remain confident of outpacing FMCG sales growth and eventually growing margins in a phased manner beyond near-term headwinds,” it said.

Analysts at Motilal Oswal Financial Services, however, have kept their EPS forecasts for FY23/FY24 broadly unchanged as it believes HUL is the best prepared among peers, both on the technology front as well as on the e-commerce strategy level, to deal with the potentially significant disruptions going forward.

“The company’s pre-Covid earnings growth was particularly impressive given the weak mid-single-digit growth posted by its (much smaller) Staples peers over the same period. We expect HUL to return to the mid-teens earnings growth range going ahead,” it said.

Those at Prabhudas Lilladher, meanwhile, have marginally increased their FY23/24 earnings per share by 0.7/1.2 per cent on calibrated price hikes and cost synergies.

It expects 11 per cent sales and 13.6 per cent profit after tax compound annual rate over FY22-24, and sees favourable risk-reward at 44x FY24 EPS and 2 per cent dividend yield.

‘Negatives priced in’

Analysts believe most of the concerns around the stock, including rural slowdown, inflation woes, and D2C premiumisation challenges, are now in the price. The stock has underperformed the Nifty50 index between March 2020 and April 2022 by around 60 per cent.

“We recommend investors to add HUL as potential upside triggers such as large players are beneficiaries of inflation in the medium term, increasing probability of turnaround in nutrition, likely improvement in rural incomes by H2FY23, and opportunities for bolt-ons, support outlook,” said ICICI Securities.

JM Financial added: HUL remains one of our favoured picks, given that the bad news on both demand and margin are by now very well-known. The stock is trading below its five-year average valuation-multiple, and is down 20 per cent from its recent peak.