India’s largest consumer care company shows negative momentum. What gives

Though HUL settled marginally higher at Rs 2,525.3 on Friday, the stock is down over 1 percent year-to-date

While 96 percent of Nifty 50 stocks traded above their 200-DMA on December 8, as the benchmark indices hit fresh highs, the stock of India’s largest consumer care company, Hindustan Unilever indicates a downtrend.

In the Nifty 50 index, 48 stocks were trading above while HUL and UPL were the only stocks below the 200-DMA/SMA (daily moving average/simple moving average).

Though HUL settled marginally higher at Rs 2,525.3 on Friday, the stock is down over 1 percent year-to-date, underperforming the Nifty 50, which has gained over 15 percent.

Compared to peers, HUL’s P/E (price to earnings) ratio of 57.79x looks expensive. In the September quarter, HUL’s net profit and revenue grew by over 3 percent and domestic volume grew by 2 percent. The results disappointed investors as the stock corrected 2 percent on October 20 after the earnings announcement.

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Jefferies assigned a ‘hold’ rating and reduced the target price to Rs 2,563 from Rs 2,720, saying growth pick-up remained elusive for the FMCG major.

The rural trend continues to be a drag for the company, as the impact of a weak monsoon becomes evident, with real wages also under pressure. Competition continues to stay high, which should be reflected in ad spending. Put together, the near-term earning outlook for HUL remains weak, according to analysts.

The Street expects HUL to see a slight negative pricing growth in Q3 FY24. Also, muted volumes will likely weigh on revenue growth. The resurgence of local and regional players remains an issue and hence, volume growth for larger competition, including HUL may continue to lag industry growth during the December quarter. Further, Jefferies sees EBITDA margins remaining range-bound at levels seen in the last few quarters.

Going ahead, a further increase in raw material prices, high competition, slower-than-expected demand recovery and de-rating of consumer multiples may keep the stock under pressure.

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“Rural markets have seen mid-single volume growth. 3Q24 will likely see tailwinds from the festive season, sustained buoyancy of services and govt’s thrust on capex. Any further inflation in the commodity basket may arrest the gross/EBITDA margin recovery witnessed by the company,” said analysts at Prabhudas Lilladher. The brokerage has a ‘Hold’ rating on the stock.

In order to hit back at rising competition, HUL recently split its beauty and personal care (BPC) segment — beauty and well-being. Under separate heads, the management expects separate business P&Ls and growth strategies. Experts believe that not much will change in the near term and the effects are likely to be visible in the longer run.

Meanwhile, UPL, which is also trading below 200-DMA, ended Friday’s session 0.3 percent lower. Even analysts turned cautious after the company posted weak Q2 results as sharp inventory markdown, inventory destocking across regions and a sharp volume decline in India dented its profitability. The stock is down nearly 19 percent YTD. Nuvama downward revised the target price to Rs 718 per share.

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