India's largest FMCG player Hindustan Unilever Limited (HUL) has been a five-year market laggard now, in part due to unwinding of a significant past re-rating phase, said global brokerage firm HSBC. The brokerage has downgraded its rating to 'Hold', reducing the target price on the HUL stock to Rs 2,700 per share from Rs 2,950 earlier.
HSBC's target on the stock suggests a further upside of 8.6% from its last closing price of Rs 2,485.5 on the NSE. The stock has tumbled 3% since the beginning of this year, as against a 5% gain in the Nifty50 index.
The September quarter results of HUL were marginally below expectations. HUL's lackluster performance has further contributed to its struggles, and the weakness continues to persist in its portfolio. HSBC sees limited upside potential for HUL unless there is a significant shift towards risk-averse market sentiment.
Key factors behind limited upside
The FMCG conglomerate's price-to-earnings ratio jumped from 40 times in 2017 to 60 times, which is now unwinding. "Growth has come down and structural margin expansion prospects have waned. Hence, this de-rating phase will persist," according to HSBC analyst Amit Sachdeva.
With a rise in competition from regional and local players, HUL is also witnessing market share loss in the mass end of the segment.
Rural recovery is expected to be gradual and regional competitive intensity continued to remain high. Advertisement spends are likely to remain firm in the near term, given the competitive intensity and brand building.
HSBC said that the growth in homecare segment, which steered HUL's overall performance until now, has peaked due to a high base and rising competition from local and regional companies and is creating a growth overhang.
Meanwhile, foods growth hasn’t been encouraging for many quarters, and beauty and personal care segment has its own challenges, Sachdeva said.
"The number of local players that have come in the market have just increased. In tea, small players' market value has grown 1.4 times that of large players. In detergent, small players' market value has grown 6 times that of large players," HUL's Chief Executive Officer Rohit Jawa said post Q2FY24 earnings.
HUL posted a 3.86% year-on-year rise in standalone net profit at Rs 2,717 crore for the second quarter. Sales for the quarter rose 3.53% YoY to Rs 15,027 crore, it said in a BSE filing.
The domestic volume growth came in at 2%, compared to CNBC-TV18's poll of 3-4% growth.
Most analysts have maintained their ‘Hold’ call on the counter. According to Emkay Global, HUL is likely to see a muted near-term show, given rural slowdown hurting its volume growth and pricing turning flat-to-negative.
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