HUL stock check: Down 3% in 2023 so far, should you bet on the FMCG major now?

2023 has been a volatile year for fast-moving consumer goods (FMCG) major Hindustan Unilever (HUL). The company's stock has declined over 3 percent this year so far against a gain of 15 percent in the benchmark Nifty FMCG index.

The stock declined 1 percent in the last 1 year compared to the Nifty FMCG index rising over 16 percent during the period.

The stock gave positive returns in 5 of the 10 months so far this year and negative returns in the remaining 5 months. The stock is flat in October so far, up 0.2 percent, snapping 3 straight months of losses. Between July and September, it shed 8 percent. However, it rose the most, 8.5 percent, in the month of May.

Even though the market witnessed an extraordinary bull run in the last few months, hitting multiple peaks; HUL was not a part of the same. The stock is still over 13 percent away from its record high of ₹2,859.30, hit on September 21, 2021. It hit a 52-week high mark of ₹2,769.65 this year in July but has lost over 10 percent since then.

Currently trading at ₹2,476.40, the stock has advanced only 3.5 percent from its 52-week low of ₹2,393, hit in March 2023.

In the long term as well, the stock has not been a strong performer. It has risen only 13.5 in the last 3 years versus a 71 percent jump in the Nifty FMCG and a 60 percent rise in the benchmark Nifty.

Earnings

HUL reported a 4 percent year-on-year (YoY) rise in its standalone net profit for the second quarter ended September (Q2FY24) at ₹2,717 crore. The company had reported a profit of ₹2,616 crore in the year-ago period.

Sequentially, the net profit was up 10 percent. Its total revenue from operations was also up just 3.6 percent YoY to ₹15,276 crore from ₹14,751 crore in the year-ago period.

Its EBITDA margin for the quarter ended September witnessed some recovery. It rose 130 bps YoY to 24.6 percent. Meanwhile, EBITDA for Q2FY24 was ₹3,694 crore, up by 9 percent on year.

The company also declared an interim dividend of ₹18 per equity share of face value of Re 1 each for the financial year ending March 31, 2024.

Is the stock a ‘buy’ at this juncture or not? 

Fundamental Views

HSBC: The brokerage downgraded HUL to Hold after Q2 earnings and cut its target price to ₹2,700 from ₹2,950. The new target implies an upside of just 9 percent. HUL has been a five-year market laggard now, in part due to unwinding of a significant past re-rating phase, HSBC said.

The brokerage sees limited upside for HUL unless there is a significant shift towards risk-averse market sentiment.

"HUL's lackluster performance has further contributed to its struggles, and the weakness continues to persist in its portfolio. HUL's price-to-earnings ratio jumped from 40x in 2017 to 60x, which is now unwinding. Growth has come down and structural margin expansion prospects have waned. Hence, this de-rating phase will persist," it said.

Jefferies: The brokerage has a Hold rating on the stock with a target price of ₹2,720, implying an upside of 10 percent. It said that post the uninspiring results, the stock price is likely to remain range-bound and may remain on the sidelines. It also cut earnings per share estimates by 3-4 percent for FY24 and FY25, with a slightly lower price target.

As per the brokerage, the impact of lower input cost inflation was evident in Q2 results, with a sharp improvement in gross margin. However, increased competitive activity led to higher media spending. HUL is trailing industry growth, and lower product prices haven't significantly boosted consumption, it added.

Prabhudas Lilladher: This brokerage also has a Hold rating on HUL and cut the target price to ₹2,786 ( ₹2,837 earlier), indicating an upside of 12.5 percent. It also cut FY24 and FY25 EPS by 0.9 percent and 2.1 percent, respectively, factoring in 1) sustained pressure on volumes 2) lower pricing element to support growth & ward off competition from local/regional players and 3) marginally higher tax rates. While a long-term growth story led by lower penetration and superior value proposition remains intact, near-term growth challenges seem likely, it said.

It has also factored in gross margin and EBITDA margin expansion of 520 bps and 120 bps, respectively, over FY23-26 as benefits of lower raw materials will be partly neutralised by higher spends on advertising, royalty and lower operating income due to the closure of marketing agreement with GSK Asia (Eno, Iodex, Crocin and Sensodyne). It estimates a CAGR of 8.3 percent in sales and 8.4 percent in PAT over FY23-26. HUL has been flat for the last 2 years and offers moderate returns. The sharp increase in crude-based inputs is a key risk to our estimates, it added.

Systematix: The brokerage also has maintained a ‘Hold’ rating on the stock with a target price of ₹2,760, implying an upside of over 11 percent, given the weak near-term growth outlook.

However, in the long-term, it expects above-industry growth led by continued premiumisation and strategic initiatives by the company. The strong operational performance can drive some positive reactions on the stock in light of the recent underperformance. Key monitorables would be the timing of industry demand recovery, commodity price trends, and competitor actions, it added.

It is building in revenue/EBITDA/PAT growth of 7.3 percent/9.9 percent/10.5 percent, respectively, over FY23-25E.

Technical Views

Ajit Mishra - SVP, Technical Research, Religare Broking Ltd

Among the FMCG majors, HUL is one of the consistent performers, maintaining a steady uptrend since 2010. Its pace of rise accelerated after the breakout from a range in 2017 and it inched from ₹870 to a new record high of ₹2,771.76 in the next four years. To accommodate that rise, it has been witnessing consolidation for the last two years and currently hovering around the support zone of medium-term moving average i.e. 100 EMA on the weekly chart.

The recent price action combined with indications from the oscillators is pointing towards further consolidation.

Aditya Gaggar, Director of Progressive Shares

For more than a year, HUL has been in the range of ₹2,425- ₹2,735, where the leading oscillator RSI (that also replicates the price behavior) also has been rangebound. Only a breakout on either side will provide a clear direction for the stock.