Monsoon, rural growth worrisome for HUL but analysts bullish

Bank of America Merill Lynch reiterates buy rating with an unchanged target of Rs 975 per share as it believes that key negatives like rising tax rate and removal of excise benefits, are now behind us and possible share buybacks/special dividends may also support the stock. It is optimistic that HUL can be a key beneficiary of revival in demand led by a likely normal monsoon, 7th Pay Commission-linked wage hikes, softer lending rates, and consumer savings linked to crude oil.

Macquarie has an outperform rating on the stock with a target price of Rs 940 per share, and expects medium term growth potential. Value growth was impacted by the phasing out of excise duty incentives, one-time credit of excise duty refund in the base quarter and price cuts as lower commodity cost was passed on to consumers.

Nomura also maintains buy rating on the stock with a target price of Rs 1040 per share. The brokerage firm expects HUL to be a beneficiary of any uptick in consumption.

Morgan Stanley reiterates overweight rating on the stock with a target price of Rs 945 per share. Key positive for the quarter was personal products operating margin expansion of 410 basis points. It feels that performance of key brands (Rin, Wheel and Lifebuoy) for HUL along with improved margins in the personal products segment, could drive earnings growth of 16 percent for F17. The highlight of the quarter for personal products, it adds, was operating margin expansion of 410 bps YoY.

Meanwhile, Deutsche Bank has a hold rating, stating that the stock is in "no man's land again". According to the brokerage firm, HUL's Q4 performance reflects the struggle in staples – price deflation or low price growth has a flow-through effect on profit growth at a time of lower volume growth in the industry.

It disagrees to the belief that price deflation has bottomed and that we are at the beginning of inflation-led revenue growth for HUL in FY2017. It expects HUL to moderate ad spends in FY2017 to manage EBITDA margins, in an environment of relatively lower competitive intensity from regional/smaller players. Considering the earnings miss and the cautious outlook on rural consumption, it has lowered FY16-18 earnings by 2-5 percent.

CLSA still holds a underperform rating with a reduced target of Rs 800 per share stating that deceleration in volume growth is a worrisome trend. It has cut earnings per share (EPS) by 2-3 percent over FY17-18. It warns that a gradual uptick in input prices along with a muted near-term demand trend still poses downside risk. It also feels that revenue growth may get some support from a rise in input prices though we are concerned about  revised forecast of 9 percent revenue growth in FY17.

IDFC maintains its underperform rating with a concern that with rural growth not seeing a revival as yet, volume growth challenges will persist at least in the near term. It has reduced FY17 earnings by 3 percent and FY18 earnings by 4 percent to factor in weak performance across core segments.

HUL posted net profit at Rs 1090 crore in January-March quarter, up 7 percent from Rs 1018 crore in corresponding quarter last fiscal. Total revenue in Q4 rose 3.5 percent at Rs 7945 crore against Rs 7675 crore in year-ago period. However, volume growth of 4 percent (YoY) in the quarter was disapointing. In Q4, gross margins rose 240 basis points (bps) at 52.6 percent versus 50.2 percent YoY. Raw material costs slipped 2.9 percent at Rs 976 crore but advertising spends increased 6.3 percent at Rs 1090 crore.

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