Home >Markets >Mark To Market >Tea in kitty would be good for HUL but demand concerns loom large

MUMBAI: Hindustan Unilever Ltd’s (HUL) parent, Unilever, is debating whether to hold on to its tea business in India and Indonesia, said a Bloomberg report on 10 July, citing people with knowledge of the matter. Note that in January, Unilever had said it has initiated a strategic review of its global tea business that could result in a partial or full sale.

Back home, shares of HUL rose nearly 2% on Monday, a day when the Nifty 50 index was marginally higher.

In general, analysts consider it would augur well if HUL retains its tea business, especially when demand for packaged foods has surged due to the covid-19 crisis. Revenues from tea are included in HUL’s food & refreshment business, which accounted for 19% of the company’s total revenues for financial year 2020. According to an analyst, tea revenues account for about 10% of HUL’s total revenues, which isn’t negligible.

Meanwhile, on an immediate basis, the subdued demand due to the pandemic-brought crisis is a big worry for HUL’s investors. For the June quarter, volumes are expected to have taken a hit.

Analysts from Kotak Institutional Equities, in their consumer staples Q1FY21 preview, said, "About 70-75% of HUL’s portfolio that can be classified as essentials grew marginally during the quarter." The broking firm added, "Whereas balance 25-30% (non-essential/discretionary) comprising skincare, hair care, color cosmetics, deodarants, ice-cream and out-of-home consumption products (Tea/Coffee vending machines) declined sharply."

The consolidation of GSK Consumer numbers should offer some comfort on the revenue front, said analysts.

Over the medium term, investors will watch for meaningful signs of demand revival and that is difficult to gauge due to the uncertainty surrounding the covid-19 pandemic.

Of course, investors seem to be factoring in the demand concerns to an extent. The HUL stock has declined by about 4% in the past three months compared to a 20% rise in the Nifty 50. Even so, it’s not as if valuations are cheap. The stock trades at 53 times estimated earnings for financial year 2022, based on Bloomberg data.

In general, a delay in recovery remains a key threat for all consumer companies and HUL is not an exception. Analysts expect the company to emerge as one of the key beneficiaries of the improvement in rural market.

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