Shares of Hindustan Unilever Ltd. gained the most in seven weeks even as analysts cut target prices for India’s largest consumer goods maker citing near-term margin pressure amid escalating raw material costs.
The maker of Dove soap and shampoo, too, has warned that significant cost pressures would dent its margin sequentially.
“We expect sequentially more inflation in the next two-three quarters and see margins decline since the sudden increase in input costs will create price versus cost gap,” said Ritesh Tiwari, chief financial officer at HUL.
In the quarter ended March, HUL saw its margin contract 80 basis points to 24%. Homecare recorded 138 basis point year-on-year operating margin contraction to 19.8%, while beauty and personal care saw 129 basis point decline to 26.2%.
Amid a challenging operating environment, however, the company saw a 11% rise in revenue, driven by price hikes. Its net profit rose 5% over the year earlier in the fourth quarter against peers such as Nestle India Ltd. that reported a decline in profit.
Analysts expect market share gains, cost-saving initiatives and pricing power to help HUL.
Shares of HUL rose more than 4.25% as of 10 a.m. on Wednesday. The stock’s trading volume is more than five times the 30-day average at this time of the day. Of the 39 analysts tracking the company, 33 maintain a ‘buy’, four suggest a ‘hold’ and two recommend a ‘sell’, according to Bloomberg data. The average of the 12-month target price implies an upside of 16.9%.
Here’s what brokerages have to say about HUL Q4 FY22 results.
Edelweiss Securities:
Maintains ‘buy’, but lowered target price to Rs 2,785 apiece from Rs 2,900.
Inflationary raw materials may continue to impact gross margin in the near term. Yet cost-saving initiatives such as zero-based budgeting, efficiency in ad spends and changes in route-to-market to help.
Merger of HUL-GSK portfolio has begun to yield revenue and the larger story will be innovation in health, food and drinks and allied categories.
HUL to be a key beneficiary of rising urban and out-of-home consumption.
HUL has the ability to outgrow the market, as well as its pricing power underpinned by distribution expansion, deepening direct reach and product innovation initiatives is a positive.
Jefferies:
Maintains ‘buy’ but cut target price to Rs 2,520 a share from Rs 2,900.
Households have become more value-seeking, and are prioritising essentials and titrating volumes. Sharper-than-expected rural slowdown in a key risk.
Raw material inflation is accelerating further and the recent palm export ban by Indonesia further adds to the volatility.
HUL, however, has good pricing power to offset margin pressures over the medium term
The brokerage values HUL at 52x March 2024 earnings.
Motilal Oswal
Maintains ‘buy’, reduces target price to Rs 2,500 from Rs 2,750 apiece.
Two factors that constrained HUL’s earnings growth (ex-GSK) over the past two years were escalating material costs and lower-than-expected premiumisation. Both these factors are likely to inhibit the company’s H1 FY23 earnings as well.
Positive factors can emerge from rural recovery fueled by a good Rabi crop, good monsoon and sustained agri commodity inflation, unless offset by input cost pressures for farmers.
The brokerage remains positive on the stock based on HUL’s continued impressive market share gains (highest decadal gain witnessed in FY22).
HUL is the best prepared among FMCG peers, both on the technology front as well as on the e-commerce strategy level, to deal with the potentially significant disruptions.
HUL’s valuations at 47.7x FY24E EPS still leave room for further upside.
HDFC Securities
Maintains ‘reduce’ but retains target price of Rs 2,000 apiece.
Demand outlook remains a concern, with volume decelerating in both rural and urban India.
With ongoing demand disruptions in mass segments and structural pressures from new-age brands in the premium space, we see limited surprise opportunities for HUL.
With geopolitical issues aggravating commodity inflation, we build in margin pressure for the near term.
Amid all these factors, growth outlook remains weak in the near term.
Nirmal Bang
Maintains ‘buy’ but pares target price to Rs 2,650 apiece from Rs 2,935, valuing it at 54x on March 2024 earnings per share estimate.
Imputed 10% pricing growth was slightly lower than our estimate of 11% for Q4 FY22.
The brokerage lowered its FY23E/FY24E EPS to 9.1%/6.3%, considering the incremental near-term margin pressure.
It is currently building in 15% earnings CAGR over FY22-24E led by scale-up of the nutrition portfolio, higher growth from beauty and cosmetics portfolio on Covid impacted base and strong growth in the home care segment.
Price hikes not expected to fully reverse as commodity cycle reverses. Cost-saving initiatives should partially offset increase in other operating costs like ad spends, etc., which have seen a sharp cut in last two years.
HUL is trading at 52.6x/43.7x on FY23E/FY24E EPS and still provides decent entry level on one-year forward basis despite concerns of subdued rural growth and continued hyper-inflation in the very near term.
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