Shares of Hindustan Unilever gained 2 percent on Tuesday after Macquarie upgraded it to outperform from a neutral rating. The brokerage house kept its target unchanged at Rs 900, implying an 8 percent upside.
Despite consumer demand continuing to remain slow, especially in the rural markets, HUL management reaffirmed its guidance of maintaining competitive volume growth and modest improvement in margins.
According to the company's management, rural demand is weak due to lower wage inflation and muted growth in agri-income. Its laundry and personal wash segment is also seeing slow growth. However, the company is growing ahead of the laundry category growth led by higher priced brands like Surf and Rin. But the growth in mass brand Wheel remains short of expectations as it faces competition from the regional brands. In personal wash, the advertising and promotion (A&P) spends continue to remain high especially at the mass end. The growth in premium brands, Dove and Pears, has been higher than the mass brands.
With increase in competitive intensity, the company's personal products growth is also slowing. "In the shampoo segment, HUL has reacted swiftly to the price actions by P&G by cutting prices on certain SKUs of Clinic Plus, Dove and TRESSemme brands," Macquarie says.
Also, the impact of the ban on Nestle's Maggi noodles is slowly ebbing and the company is now seeing sales of its Knorr brand starting to stabilise.
Macquarie continues to remain positive on HUL's medium-term growth potential. "While the near-term demand remains sluggish, it believes the recent stock price correction (20 percent decline in the last six months) provides a good buying opportunity from a mid-to long-term perspective," it says. However, the brokerage house has lowered its FY15-18E earnings by 5 percent on lower sales growth expectation.
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