HUL hits new high on strong Q2; analysts' outlook mixed

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HUL hits new high on strong Q2; analysts' outlook mixed

Just last year Hindustan Unilever found itself fighting a bitter price war with Procter & Gamble, especially in the detergents business. Many analysts downgraded the largest FMCG company in India saying the aggressive price competition would ultimately render the detergents business unprofitable.

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ALSO READ News and Notices about HUL See interviews with HUL Management See what other Experts & Brokerages are saying about HUL See previous Results of HUL HUL BSE | NSE 31/05/12 Are Mutual Funds betting on HUL?

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Just last year Hindustan Unilever found itself fighting a bitter price war with Procter & Gamble, especially in the detergents business. Many analysts downgraded the largest FMCG company in India saying the aggressive price competition would ultimately render the detergents business unprofitable. HUL too found itself fighting to defend market share and margins.

However, things have turned around dramatically, at least this is what second quarter results suggest. HUL's second quarter net profit surged 22% year-on-year to Rs 688.92 crore, and net sales were up 18% to Rs 5,522.16 crore. The better-than-expected results also pleasantly surprised the markets, sending investors rushing to buy the stock.

HUL shares surged 7% on Monday and rose further 2% on Tuesday to hit a new life high of Rs 383.65 on NSE. The results also got a big pat from analysts.

"HUL reported a brilliant set of numbers...The company's focus on new product development and a shift towards a more premium portfolio are creating a more relevant, fast growing and increasingly profitable portfolio [visible in 15%+ growth in domestic categories and improving margins]. HUL has transformed from the worst performing consumer stock globally to the best over the last year while mid-tiers underperformed," said Nikhil Vora and Varun Kejriwal of IDFC Institutional Securities.

"Despite cut in ad spend rivals failed to cut lather and HUL's volume grew robustly indicating brand salience, aggression and strong product pipeline. We believe this momentum will continue in the coming quarter with increased focus on innovation, new product launches, the food category and calibrated price hike," said Edelweiss Securities in a separate note.

"Results well ahead of expectations...Consistent strategy yields dividends, finally," said Citigroup's Jamshed Dadabhoy and Aditya Mathur.

Pritesh Chheda and Sweta Jain of Emkay Global Financial Services have raised HUL's FY12 and FY13 EPS [earnings per share] estimates by 5.9% and 5.6% respectively, citing the better-than-expected results. 

HUL shares have jumped 31% since April this year, well ahead of its peers. The CNX FMCG index is up 16% during the same period. So is there any upside left in the stock?

Edelweiss has maintained "buy" on HUL and IDFC feels it will be an "outperformer." IDFC has a target price of Rs 400 on the stock. However, not all are convinced HUL will be able to maintain the strong momentum ahead.

Emkay, for instance, downgraded HUL to "hold" from "accumulate," with a target price of Rs 347.

"We believe all the upside catalysts have played out and do not see further catalysts in the near-term. At current market price, we feel there is limited upside left, if any," the Emkay analysts said.

Citigroup too has a "neutral" rating on HUL.

"We think HUL will remain challenged on multiple fronts - given the heightened competition, strategically ad spends will remain elevated, and investments in new brands/categories will continue to impact margins. With management's twin focus on volume growth and defense of its market shares, we think margin expansion may remain muted. In the short term, concerns on input costs remain," the Citi analysts said.

At 13:00 hrs, HUL shares were trading up 1.8% at Rs 382.50 on NSE on Tuesday.

Nachiket Kelkar
nachiket.kelkar@network18online.com