Mumbai: The Hindustan Unilever Ltd (HUL) stock shed more than 2% in the past two trading days after its parent Unilever Plc. cut revenue growth guidance. This means volume growth outlook may be at risk for one of India’s top consumer staples’ firms. Unilever cut its revenue growth forecast for 2019 to below 3%.

“While it is tough to back-calculate HUL’s growth, it is reasonable to assume that it would have slowed down more than the average slowdown of about 150 basis points for Unilever," analysts from Credit Suisse Securities (India) Pvt. Ltd said in a 17 December report. A basis point is one-hundredth of a percentage point.

“This would imply revenue growth of below 5% for the December quarter and volume growth of about 3%," added Credit Suisse.

For perspective, these numbers are sequentially lower. For the September quarter, HUL’s total operating revenue increased by 6.7% from a year earlier. At the same time, volume growth, which had dropped to a seven-quarter low of 5% in the June quarter, remained steady at the same rate for the September quarter.

“For Q3FY20, we now expect low single-digit volume growth (about 2-3%)," said SBICAP Securities Ltd.

Santosh Sharma/Mint.
Santosh Sharma/Mint.

Commenting on the overall market conditions, the company’s management recently told Motilal Oswal Financial Services Ltd’s analysts, “The company doesn’t see a sharp demand turnaround for another two quarters." The management also added that rural demand has seen a slight sequential slowdown.

Note that in its September quarter earnings presentation, the company had said rural market growth is only 0.5 time that of the urban one.

Additionally, demand conditions for fast-moving consumer goods companies have not recovered as expected.

“With inflationary food items and rising telecom tariffs, the consumers’ spending power appears to have faded. This is why we see higher price offs in the market now," point out SBICAP analysts in a report on 17 December. Price-offs refer to price promotions.

Meanwhile, HUL’s investors appear to have taken note of the lack of improvement in the demand situation. Small wonder, the company’s shares have declined by almost 12% from its 52-week high intraday price of 2,190 per share seen on 7 November.

But this doesn’t bring much respite on the valuation front. According to Bloomberg data, at the current market price of 1,928.55, the HUL stock trades at 57 times estimated earnings for FY20, which is still steep. Investors will wait for signs of demand pickup in the coming days but optimism on this runs low at the moment.

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