Hindustan Unilever shares extended Friday's losses on concerns of volume growth pressures and poor performance in some segments like packaged foods. Also, Jefferies downgraded it to "underperform" from "hold" on Monday, flagging rich valuations, which put further pressure on the stock.
"Soaps and detergents revenues are growing at over 20% in a category that is well-penetrated and has historically grown at 10-12% per annum. Given the highly cyclical nature of this segment, we find the current pricing-led growth to be unsustainable. Implied valuations for the segment, 29 times FY14 expected EPS (valuing personal products at 35 times), look rich considering that we are likely at the peak of the earnings cycle in this category," Jefferies analysts Rajasa Kakulavarapu and Govindarajan Chellappa said.
The India's largest fast moving consumer goods maker beat street expectations with a net profit of Rs 807 crore, up 17% year-on-year in the second quarter, but its total income grew lower-than-expected 12% at Rs 6,311 crore. The company disappointed largely on slower volume growth of 7% in the quarter, compared with 9% in Q1 and analysts' expectations of 8-8.5%.
"Slight moderation in domestic volume growth of 7% YoY (120bps negative impact due to decline in sales in canteen stores department), slow 12.1% growth in personal products (impacted due to price hike in Fair & Lovely sachet) and disappointing margins in packaged foods (declined 471 bps YoY), were key negatives," according to a report by Edelweiss Securities.
However, Edelweiss feels HUL's outlook and valuations are positive as it is aggressively investing in categories that will pay rich dividends from a 3-5 year perspective.
Among other analysts, Abhijeet Kundu of Antique Stock Broking maintained a "hold" rating on the stock, saying "valuation is a key concern in addition to lack of further triggers for earnings growth surprises."
Motilal Oswal too has a "neutral" rating on HUL.
"Tepid personal product numbers and continued sedate performance in processed foods and beverage does pose a concern given the premium valuations, which it trades at," it said.
At 11:40 hrs, HUL shares were down 1.1%545.95 on NSE.