BackShort term rough for HUL, but long-term prospects seem better
With consumers rushing to stock up on staples, this month’s performance could be relatively better
PremiumThe Hindustan Unilever Ltd (HUL) stock was a big gainer in the Nifty FMCG (fast-moving consumer goods) index on Friday. The stock surged as much as 11.6% compared to the 8% rise in the sectoral index.
Before this, the stock had declined substantially by 20% from its 52-week trading high on 19 February. The recent market correction substantially hit the stock of the country’s largest FMCG company as well.
Nevertheless, analysts remained positive on HUL’s long-term prospects, although muted demand is likely to weigh on the performance in the near future.
“As per our checks, with no tailwinds, the demand environment has been weak in the March quarter. January and February stood weaker than December," said analysts at SBICAP Securities Ltd in a report on 20 March. With consumers rushing to stock up on staples, this month’s performance could be relatively better.
“We see March quarter volume growth at about 4%," added SBICAP’s analysts. This is a marginal deceleration from the first three quarters of the current fiscal year, when HUL had delivered steady volume growth of 5%.
With Covid-19 looming, there are concerns on how the June quarter would shape up. Of course, much depends on how soon the pandemic subsides, but that’s uncertain territory.
Meanwhile, HUL’s long-term growth prospects seem better, particularly on the profitability front. In fact, margin expansion has been remarkable in the past few years.
“FY2015-20E Ebitda margin expansion has been 916 basis points versus 214 basis points over the 10-year period from FY2005-15," said analysts at Kotak Institutional Equities in a report on 19 March. Ebitda is earnings before interest, tax, depreciation and amortization.
“We believe the company could continue expanding margins at a healthy pace," added Kotak’s analysts.
Of course, it helps if crude oil prices continue to remain low, offering some relief on input costs.
To be sure, investors appear to be capturing a good share of the optimism in the HUL stock. Factoring in Friday’s gains, the stock trades close to 51 times estimated earnings for FY21, according to Bloomberg data.
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