Jefferies gives ‘hold’ rating to Hindustan Unilever, reduces target price; here’s why

Brokerage firm Jefferies has shared ‘hold’ rating to FMCG major Hindustan Unilever (HUL), saying growth pick-up remained elusive. The brokerage firm has also reduced the target price from ₹2,720 to ₹2,563 per share.

HUL stock plunged over 1.5% to ₹2,500 in early morning trade on December 7, against previous close at ₹2,567 per share.

"Our channel checks and industry interactions indicate that October demand trends remained similar to Q2 as festive growth pick-up did not materialise as expected,” Jefferies’ analysts wrote in a note.

The rural downturn persists, exacerbated by the discernible effects of a deficient monsoon, further compounded by the additional challenge of declining real wages. “The competition continues to stay high, which should reflect in ad-spends. Put together, the near-term outlook for HUL remains weak. We stay on the sidelines," the brokerage firm added.

In terms of competition, analysts note that the revival of local and regional players poses a challenge. Consequently, the larger players, such as HUL, are expected to experience slower volume growth compared to the overall industry during the December quarter.

Jefferies emphasized the structural shifts within Hindustan Unilever as the company restructured its BPC (Beauty and Personal Care) segment into two distinct entities: Beauty & Well-being and Personal Care. This strategic move aims to enhance focus and better align with global Unilever segments. 

Leading these newly formed segments are Harman Dhillon and Kartik Chandrasekhar. Furthermore, in a bid to drive digital transformation, Arun Neelakantan has been appointed as the Chief Digital Officer and is now a part of the management committee.

Furthermore, according to a Nielsen report, pricing growth for leading FMCG (Fast Moving Consumer Goods) companies has entered negative territory. This shift is attributed to adjustments in trade pipelines and the incorporation of product price reductions by companies, which are now manifesting in retail sales.

"HUL, too, should see a slight negative pricing growth in Q3. No major pricing changes were done in Q3, albeit price cuts from prior quarters would reflect fully in Q3. This along with muted volumes will likely weigh on revenue growth," the brokerage firm said.

Jefferies anticipates that Hindustan Unilever Limited (HUL) will experience subdued earnings growth in the short run. This projection stems from a gradual volume recovery, a decline in price growth, and limited margin recovery due to increased advertising expenditures and heightened competition.