Hindustan Unilever stock races ahead on Q4 show, market share gains

The stock of Hindustan Unilever (HUL) was up 4.8 per cent after the company delivered better than expected March quarter (Q4FY22) performance amid multiple headwinds. The stock is the top gainer in the benchmark indices–Sensex and Nifty. The Street is also enthused by market share gains in FY22 and management’s confidence on further gains going ahead, gradual improvement in margins as well as a hope of recovery in rural markets.

The immediate trigger for the stock is the beat across all parameters in the March quarter and delivering on growth despite the demand headwinds. Say Richard Liu and Sumanyu Saraf of JM Financial, “Given the external environment (demand weakness plus elevated input-costs pressure), the fact that HUL was able to deliver the kind of earnings-report that it did for 4QFY22 speaks a lot about the sort of control and grasp that management has on its businesses, and consequently on the overall shape of its financials.”

Despite the rural slowdown and demand hit in the discretionary categories the company was able to deliver a flattish volume growth performance as compared to the street estimates of a 3-4 per cent decline. Volume growth was also impacted by the reduction in grammage of low unit packs which accounts for 30 per cent of volumes.

With volumes remaining flat, revenue growth was largely due to the price hikes taken by the company. The company took a cumulative price hike of 10 per cent to counter the sharp rise in costs of tea, crude oil derivatives and palm oil. Given the calibrated price hikes amid hyperinflation pressures, profitability took a hit. Gross margins were down 331 basis points y-o-y to 49.5 per cent.

Though margins took a hit at the gross level, the impact at the operating level was a moderate 30 basis points. The 220 basis points decline in advertising spends to sales and cost reduction initiatives helped arrest the impact of commodity inflation. The company indicated that margins would be under pressure over the next couple of quarters.

The company's response to the surge in costs is the right one, feel analysts. Says Vishal Gutka of PhillipCapital Research, “We believe HUL has deployed the right strategy in the near term; it could be margin dilutive but will help in market share gains via shift from unbranded to branded across categories and at the same time, further strengthen its leadership position.” Even in the organised segment, there is little risk of competitors going aggressive to score on volume growth in this environment.

Despite the beat, there are many hurdles in the near term which could weigh on the stock. Say analysts, led by Krishnan Sambamoorthy of Motilal Oswal Research, “Two factors that constrained the company’s earnings growth (excluding GSK) over the past two years were escalating material costs and lower-than-expected premiumization. Both these factors are likely to inhibit the company’s H1FY23 earnings as well.”

In addition to margins, the Street will keep an eye on the demand trends of the rural market. Both volume and value growth have taken a hit in the rural segment with demand taking a turn for the worse over the past three months even as the urban market has seen a recovery brought on by higher mobility. A normal monsoon, higher crop realisations and government measures for the segment will be critical for demand improvement going ahead.

Given the Q4 show, market outperformance and gradual improvement in margins going ahead, most brokerages have a buy rating on the stock. Valuation comfort as compared to its five year averages is also a trigger for the stock.