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HUL stock trades at a stiff valuation of 73.32 times its FY20 earnings.. Photo: Reuters
HUL stock trades at a stiff valuation of 73.32 times its FY20 earnings.. Photo: Reuters

HUL's covid-19 update: A reality check for investors

  • A positive is that the company has been able to ramp up its operations in the past few months
  • HUL said it does not foresee any incremental risk concerning its ability to service financial arrangements.

MUMBAI: Shares of Hindustan Unilever Ltd have been among those holding up steadily on the back of a decent prospect in fast-moving consumer goods segment. The latest update on the company's business being disrupted has not dented the stock price much. HUL stock was marginally down at 0.4% early Wednesday.

HUL said the impact on discretionary categories like hair care, skincare and colour cosmetics is more accentuated. While there is some demand revival in these categories, it could take a while for sales to fully recover in these segments.

Other categories such as ice cream and foods solutions and consumer durables business of water have been worst hit by the lockdown. HUL also noted that loss of livelihoods has taken a substantial toll on consumer demand.

Demand in categories like hygiene, though, has picked up post the outbreak of the pandemic. HUL said there is heightened consumer focus on health, hygiene and nutritional needs amid the pandemic. Hence, some of its categories such as skin cleansing, home & hygiene, nutrition, tea, coffee and foods are better positioned to cater to these consumer demand spaces.

Another positive is that the company has been able to ramp up its operations in the past few months. “Immediately following the nationwide lockdown on account of the COVID-19 crisis, operations came to a near standstill; HUVR was able to operate at 5% of pre-COVID normative levels. The company was able to gradually improve operations to 70% in April and has now successfully ramped up its production to 80–90% of normative levels," said analysts at Motilal Oswal Financial Services in a note to clients.

HUL also said it does not foresee any incremental risk concerning its ability to service financial arrangements. The company has a good cushion to deploy credit to support its supply chains.

Of course, some of the disruption due to covid-19 has been factored in by analysts. The profitability of the company is likely to be impacted in Q1FY21 with analysts factoring about 10-12% volume decline. However, normalised volume growth is expected from Q2 onwards.

Additionally, HUL’s merger of GlaxoSmithKline Consumer Healthcare’s business with itself is expected to bring synergy benefits. But the stock still may not provide much comfort as it trades at a stiff valuation of 73.32 times its FY20 earnings.

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