HUL hits 18-month low; stock plunges 8% in 2 days post weak Q3 results

Shares of Hindustan Unilever (HUL) hit an 18-month low of Rs 2,365.50 as they slipped nearly 4 per cent on the BSE in Tuesday's intraday trade amid heavy volumes. In the past two trading days, the stock of the fast moving consumer goods (FMCG) company has plunged 7 per cent after it reported disappointing December quarter (Q3FY24) earnings due to weak demand.

The market price of HUL has fallen below its previous low of Rs 2,393, hit on March 15, 2023. It is trading at its lowest level since July 2022. In the past one year, the stock has underperformed the market by falling 9 per cent as compared to a 16-per cent rally in the S&P BSE Sensex.

In Q3FY24, HUL's net sales declined 0.3 per cent year-on-year (Y-o-Y) led by flat/2 per cent value/volume growth Y-o-Y in the domestic segment due to passing on of benefits of softening raw materials to consumers. Its net profit grew 1 per cent Y-o-Y, while Ebitda margin remained flat at 23.3 per cent.

The management expects to maintain Ebitda margin at around 23-24 per cent in the near term. The management reiterated that overall volume growth is likely to recover gradually aided by government spending, recovery in winter sowing, and better crop realisation.

The demand environment, however, has remained challenging, witnessing only gradual recovery due to  erratic monsoon, delayed winter, subdued festive season, and slower-than-expected recovery in rural areas, according to analysts.

"Recovery from rural markets remained elusive in H1FY24. Gradual volume recovery with flat/negative pricing growth and limited margin expansion at current levels restricts the upside," said analysts at InCred Equities who maintained a 'Hold' rating on the stock.

Analysts at Emkay Global Financial Services, too, believe demand slowdown, competitive pressure, distribution stress, and rising royalty rates are likely to have an overhang on HUL's valuations (46x P/E for FY26).

"Management commentary on demand setting remains unexciting as demand recovery remains a hope on the emergence of tailwinds. Reinforcing general trade moat is now an added pressure with changes in distributor margin structure, in our view," the brokerage firm said in its result update.

However, on a longer-term basis, HUL's growth prospects remain strong as the management focuses on driving a broad-based portfolio and straddling across the price-value matrix to increase premiumisation and continued focus on improving efficiency – nano factories, automation, and scaling Shikar to drive overall cost savings initiatives, according to analysts at Axis Securities.

"The company's market development action to gain market share across the portfolio, and strong execution capabilities (which displays its strength in diverse product portfolio and strong financial prowess in this volatile and challenging environment)," the brokerage firm said.