HUL gains 6% in June on demand recovery hope, market share improvement

Brokerages expect sales and earnings to grow faster than peers

Expectations of a recovery, improving demand trends and market share gains despite price hikes led to brokerage upgrades for the country’s largest consumer company, Hindustan Unilever (HUL). After trading flat over the last six months, the HUL stock has been on an uptrend gaining about 6 per cent in June.

Health and hygiene, which accounts for 70 per cent of sales has seen a sequential uptick in the June quarter led by higher demand. Growth is being driven by the rural segment which is doing better than urban areas. Given the expectations of a normal monsoon, robust rabi harvest and rural employment schemes (MNREGA), rural demand should remain strong.

What could take more time to recover are the discretionary categories such as skin care, colour cosmetics, deodorants and out-of-home segments that account for 20 per cent of sales. Demand for these products was impacted due to the restricted hours of operations in urban areas, though sales were better than the year ago period.

While growth should improve, margins in the near term could come under pressure as price hikes and improving product mix are not enough to offset the inflation in key inputs of palm oil, crude oil and tea.  

The street, however, is bullish about the prospects of the company given its performance over the last year, its unparalleled distribution and execution. Analysts led by Krishnan Sambamoorthy of Motilal Oswal Financial Services say that despite a highly disruptive year, the company posted an net profit growth of 11.5 per cent in FY21. This is particularly impressive given the weak mid-single-digit earnings growth posted by (much smaller) peers in recent years, they add.

What will aid in driving industry leading growth over the medium term, according to Nomura Research is market share gains and increasing penetration in 82-87 per cent of its business despite taking price hikes.

Going ahead, most analysts expect the company to post 15-20 per cent earnings growth over the next couple of years. While there is upside at current valuations as target prices range from Rs 2,700 to Rs 3,000, a better entry point with a long holding period should offer sizeable returns.