Home >Markets >Mark To Market >HUL’s high input costs are a worry, but valuations soothe

Rising input costs are a threat to many companies these days and Hindustan Unilever Ltd (HUL) is not an exception.

An increase in the prices of tea, palm oil, and crude oil derivatives are the main factors expected to keep a check on HUL’s profit margins in the coming days. Even so, there are some offsetting factors.

One, valuations of the HUL stock are not as demanding, according to analysts. Shares of HUL trade at a one-year forward price-to-earnings ratio of almost 54 times, almost the same as the three-year average price-to-earnings ratio.

Moderating valuations
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Moderating valuations

“HUL’s valuations have moderated quite a bit from the peak, which makes valuations compelling," said an analyst requesting anonymity.

Two, price hikes are expected to help HUL offset inflationary pressures to some extent at least.

“The impact of sharp rise in input prices is inevitable, but we believe that the impact may be less than the general perception. This is because of a hike in product price, mix improvement, self-help measures on costs, and operating leverage benefits," said analysts from Jefferies India Pvt. Ltd in a report on 3 March.

“We currently build-in about 6% product price hike in FY22 and history suggests that HUL could easily pass this on," the broking firm added.

Not that HUL’s profit margin performance had disappointed in the December quarter.

Earnings before interest, tax, depreciation and amortizaiton (Ebitda) margin had declined by 87 basis points year-on-year. One basis point is one-hundredth of a percentage point.

Margins will also get some respite as the recovery in HUL’s high-margin discretionary portfolio starts to pick up pace, according to analysts. The discretionary segment accounts for about 15% of the company’s revenues and includes skin care products.

According to HUL’s December quarter earnings presentation, the discretionary segment saw a 1% decline during the quarter. In the September and June quarters, the company’s discretionary categories had declined by 25% and 45%, respectively.

Further, depending on how mobility pans out, investors will closely watch how the laundry segment would fare. Needless to say, faster improvement in the category would augur well.

Overall, Jefferies has cut its FY22/23E earnings per share (EPS) forecast by 4-5% to factor in input price surge, but expects HUL to report a strong 14% EPS compound annual growth rate over FY21-23E.

So far in 2021, the HUL stock has declined by about 8.2% compared to a 2.8% decline in the Nifty FMCG index.

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