For some time, defensive stocks, such as Hindustan Unilever Ltd (HUL), were among the firms investors preferred. But now a risk-on trade is happening at a time when HUL begins to feel the heat of slacking GDP (gross domestic product) growth. In the past one month, the stock has been under stress, falling 2.2% in contrast to a 9.47% rise in the Nifty 500 index. And, valuations are sky-high at 59 times estimated FY19 earnings, which itself makes a case for a correction.

One of the big concerns for the stock is whether volume growth will continue to meet or beat expectations as the Indian economy slows. HUL has been showing strong double-digit volume growth for the past five quarters due to the benefits it garnered from the implementation of the goods and services tax (GST). In the December quarter (Q3), volumes climbed 10% year-on-year. But they may be tapering off. “Industry demand appears to be somewhat moderating," CLSA said in a note to clients. “This is mainly due to a weak macro environment (moderation of GDP growth, wage inflation, etc.)."

Near-term volume growth is also likely to be impacted by a higher base.

“Organic growth may be a little lower than what it was in the past few quarters. There were some benefits of a lower base. Hence, the same kind of growth continuing might be a slight challenge," said Naveen Kulkarni, head of research at Reliance Securities Ltd.

Further, against upbeat margins in the June (Q1 FY19) and September (Q2 FY19) quarters, HUL reported lower margins of 21.9% in Q3 FY19. Even though it did well to rein in costs while increasing product prices, pressure from rising raw material costs has been evident.

Analysts at Kotak Institutional Equities see a steady demand environment, but no meaningful acceleration just yet. In a report the firm noted: “The recent fall in crude price is a tailwind though P&G-led competitive-intensity in detergents will keep a check on margin expansion. We expect HUL to continue to deliver steady growth, but do not see room for earnings upgrades."

P&G is Procter and Gamble Hygiene and Health Care Ltd.

To be sure, the company continues to focus on ramping up sales of high-margin products. It’s also focusing on cost rationalization. Besides, the synergies of its merger with Glaxo Smithkline Consumer Healthcare Ltd are yet to kick in. This is expected after December 2019, on completion of the HUL-GSK merger.

Still, concerns weigh in the short run. HUL’s stock is up 29.8% in the past one year and, as mentioned earlier, valuations are high. Analysts say the company lacks triggers that can propel the stock forward for now. Hence, watching the coming quarter closely is critical to see if volume growth and margins continue to remain firm.

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