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Hindustan Unilever stock may get some support from improving demand trends

The organic underlying volume growth is a meaningful jump from 4% and 1% growth seen in the December quarter and September quarter, respectively. (Photo: Mint)Premium
The organic underlying volume growth is a meaningful jump from 4% and 1% growth seen in the December quarter and September quarter, respectively. (Photo: Mint)

  • Investors can expect HUL’s discretionary and out-of-home portfolios to see a decent recovery in the March quarter. HUL’s margins may get some respite as the recovery in its high-margin discretionary portfolio starts to pick up pace

MUMBAI: Shares of Hindustan Unilever Ltd (HUL) have underperformed broader markets in the past few months. The HUL stock has risen about 16% in the last six months vis-à-vis a 32% increase in the Nifty 100 index.

But demand trends are getting better and may well offer support to the stock, going ahead. The fast-moving consumer goods (FMCG) company is set to witness a substantial improvement in its March quarter performance.

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“Growth momentum has improved sequentially, with economic revival over the past couple of months (our March quarter underlying volume growth estimate +13% year-on-year, underlying value growth estimate +18% year-on-year, value growth including GSKCH +30% year-on-year)." said analysts from Nomura Financial Advisory and Securities (India) Pvt. Ltd in a report on 16 March.

The organic underlying volume growth is a meaningful jump from 4% and 1% growth seen in the December quarter and September quarter, respectively.

Nomura added, “Health, hygiene, nutrition portfolio (80% of sales): demand remains elevated but tailwinds are waning gradually." This segment had grown 10% in each in the June and September quarter.

Investors can expect HUL’s discretionary and out-of-home portfolios to see a decent recovery in the March quarter. According to analysts, HUL’s margins may get some respite as the recovery in its high-margin discretionary portfolio starts to pick up pace.

Note that the discretionary segment accounts for about 15% of HUL’s revenues and includes skin care products. As per its October-December earnings presentation, the discretionary segment saw a 1% decline during the quarter. This is an improvement from 25% and 45% decline in the discretionary categories seen in the September and June quarter, respectively.

To be sure, higher input costs are a risk to HUL.

"To offset input price inflation, HUL has been implementing calibrated price hikes," inform analysts from Jefferies India Pvt. Ltd in a report on 22 March. "For soaps, a price hike of up to 10% is needed just to offset input inflation. Against this, a 3% price hike was effected in 3Q (December quarter), further increases were applied in 4Q and more are planned for the coming days. Price hikes have been initiated even in laundry. Hence, sales growth mix should shift towards pricing versus volumes in the coming quarters," added Jefferies’ analysts in the report.

Meanwhile, the HUL stock is now trading at about 57 times estimated earnings for financial year 2022, based on Bloomberg data.

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