HUL hits 52-week high on strong Q1; what do analysts say?

Shares of India's largest FMCG company Hindustan Unilever surged over 7% and touched a 52-week high of Rs 477.55 on Monday after investors cheered the company's strong performance for the first quarter.

HUL had late Monday reported a first quarter net profit of Rs 1,331 crore, more than double compared with the year ago quarter, helped by exceptional gains from sale of properties and a surge in other income. Its net sales for the quarter were up 14% to Rs 6,250 crore. Profit after tax, but before exceptional items rose 48% to Rs 855 crore in April-June.

Analysts on average had expected HUL to report a net profit of Rs 710 crore on revenue of Rs 6,279 crore, according to a CNBC-TV18 poll.

"HUL's results quality continues to be good - 9% volume growth, gross margin expansion of 210 bps likely driven by mix improvement and some benefits of lower input costs, and continuing good growth in personal products (17%)," said Manoj Menon and Amrita Basu of Kotak Institutional Equities.

The company has started reaping the benefits of focus on premiumisation, the two analysts say. For instance, Dove shampoo volumes doubled in Q1, Comfort fabric conditioners doubled in size and Surf and Rin detergents have also been growing in double digit volumes, they note.

"HUL results gave a positive surprise on all counts by continuing to show strong volume growth, aided by margin expansion," said Emkay Global Financial Services. It expects earnings to be upgraded post the strong growth.

The company has so far managed to shrug off economic slowdown and high inflationary pressures. Its stock too has risen over 8% this financial year, compared to the over 3% decline in wider Nifty index. But will a truant monsoon play a spoilsport for FMCG companies this year, especially given firms like HUL derive over 40% of its sales from rural areas?

"HUL's Q1 core operating performance was encouraging. We believe this momentum will continue in the coming quarter with increased focus on innovation, new product launches, food category and calibrated price hike. However, key concern remains shortage of rainfall which may shrink rural consumption," said Edelweiss Securities.

Other analysts like Kaustubh Pawaskar of Sharekhan are also concerned about the poor monsoon and the overall macro-economic environment (slow growth, high inflation etc).

Although there are measures like National Rural Employment Guarantee Scheme, a poor monsoon will have some impact on rural consumer demand, Pawaskar told moneycontrol.com.

He also feels there could be some downtrading in some categories, which already are highly penetrated.

Rural markets have been growing at a faster clip in recent years, and FMCG companies like HUL have been focusing on expanding their reach in India's hinterlands.

HUL itself plans to create 50 rural-urban hubs to link rural markets with urban areas.

HUL's CFO R Sridhar said on Tuesday that a deficient monsoon would "most certainly" have an impact on the economy, rural markets and price of food products. One will have to wait for the quarter (Q2) to play out, he said.

Edelweiss still has a "buy" rating on the stock. Kotak advises investors "add" HUL shares and says it remains a "preferred pick."

However, Sharekhan has a "hold" on the stock, saying the current valuations at 27 times FY14 earnings are high and there is unlikely to be any substantial upside from current levels.

At 14:00 hrs, HUL was up 7.4% at Rs 475.80 on NSE.

Nachiket Kelkar
nachiket.kelkar@network18online.com