As the numbers for the fourth quarter trickle in, the Street has clearly given Hindustan Unilever and HDFC Life’s earnings show a thumbs down. While both have been under pressure, some analysts have taken a contrarian stance and upgraded their ratings.
HUL shares fell around 1.5 percent in April , and insurance major HDFC Life’s stock tumbled close to 8 percent.
From eight 'hold' calls and 26 'buy' calls in March, HDFC Life has seen three upgrades, it has 'five' hold calls and 29 'buy' calls as of April 30. Hindustan Unilever shares had 20 'buy' ratings in March, which jumped to 24 in April.
What’s driving analyst optimism in HDFC Life?
HDFC Life Insurance Company got a thumbs up from broking firm Citi, ahead of the company's quarterly earnings. Citi upgraded its rating for HDFC Life to a 'buy', assigning the stock a target price of Rs 720 per share, a 19 percent potential upside from current levels.
Citi's rating upgrade was based on HDFC Life's underperformance in comparison to not just its listed peers, but also the Nifty 50 in the past one year, which made valuations reasonable.
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Meanwhile, Citi also expects the company's efforts to strengthen its agency base in FY24 to trigger some positive impact on its earnings. "Any likely revival in growth at HDFC Bank will further aid prospects for HDFC Life," Citi stated.
JM Financial also initiated coverage on the insurance sector, and despite its underperformance, HDFC Life was the brokerage's top bet during the quarter.
The brokerage said that HDFC Life has faced multiple headwinds, coming in from taxation on higher ticket policies, bloated costs due to Exide Life acquisition and competition in parent banca.
The stock has derated on concerns of strict regulations and HDFC Bank bringing its shareholding to below 50 percent. Over the past six months, the shares have fallen 12 percent.
What’s driving analyst optimism in Hindustan Unilever?
HUL's fourth quarter numbers did not go down well with the street. However broking firm Prabhudas Lillader took a contrarian view and upgraded its rating on the stock.
The brokerage cited favourable risk-reward ratio as the key trigger, following tepid returns over the last four years.
However, a significant rerating looks unlikely given the high valuations and the current market momentum, which is favoring cyclical stocks.
Also Read | HUL Q4 results: Net profit falls 6% to Rs 2,406 cr
This view largely differs from that of the street, as most brokerages slashed the target prices on the Hindustan Unilever stock. The growth outlook for the FMCG giant remains uncertain, according to experts.
But a rerating cannot be ruled out altogether “With negatives largely known, the stock’s very low return over the last three years and valuation below historical average could likely provide some support on the downside. Given the tough operating landscape, rerating will be contingent on better visibility on volume acceleration and double-digit earnings growth,” JM Financial said.
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