India's largest FMCG company gets analyst downgrades after subdued Q3 results

Shares of Hindustan Unilever (HUL) fell 2% in trade on Saturday, January 20, after analysts at most brokerage firms slashed their targets on the fast-moving consumer goods (FMCG) sector bellwether following its December quarter earnings which were muted.

India's largest consumer goods company posted muted Q3 numbers with flat revenue and net profit rising a mere 0.6% year-on-year—below Street's estimates. Volumes grew 2% YoY against Street's forecast of 2-3%. HUL in its investor presentation mentioned that the operating environment remains challenging.

HUL's third quarter performance was below expectations on revenue and profit, and this does not appear to be merely a symptom of macro weakness, said global broking house HSBC while downgrading the stock to 'Reduce'. The brokerage also trimmed its target price to ₹2,350 from ₹2,700 a share earlier.

The foreign brokerage also said that HUL's outlook appears uncertain and growth is lacklustre.

Morgan Stanley said HUL's numbers were below estimate for the fourth quarter in a row. The company reported weaker top-line growth due to lower volume growth, it said while maintaining an 'Equal-weight' call on the stock.

The brokerage doesn't see any recovery in sight and said that negative pricing growth remains a headwind. It has also cut its target to ₹2,424 a share, implying a downside of 5% from the current market levels.

Emkay Global also cut its target on the stock to ₹2,700 from ₹2,800 earlier as it believes that the demand slowdown, competitive pressure, distribution stress, and rising royalty rates are likely to have an overhang on HUL's valuations.

"Capturing demand pressure, we have revised our topline expectations down by 3%, which led to a 3% cut in earnings. We are now 6-7% below consensus expectations for FY25 and FY26," the domestic brokerage firm said.

Maintaining an 'Add' rating with a limited upside, Emkay said the stock's valuations at 46 times for FY26, though factoring in near-term pressure, may see a derating if volume recovery remains elusive in FY25.

According to Nuvama, the miss on sales and weak revenue was due to price cuts taken to pass on the benefit of commodity deflation.

"Home care dipped 1% YoY while BPC remained flat. Food & refreshments delivered pricing-led growth of 1% YoY. Overall, HUL posted decent volume growth in home and personal care that was marred by a dip in F&R. All in all, we are cutting FY24E/25E EPS by 5%/3%, yielding a revised target of ₹3,105 (earlier target ₹3,210); maintain 'Buy'," the brokerage said.

HUL's concall highlighted that the company expects pricing growth of 4-5% in the longer term. The rural premium portfolio has also grown well like the urban premium portfolio. Urban continues to outpace rural. The company generates 30% of its revenue from price point packs; these help it gain more penetration, and are an important part of the company, as per Nuvama.

Meanwhile, Deepak Shenoy of Capitalmind in a tweet on X said he finds it strange how markets work sometimes. He cited HUL's 1% increase in earnings, 0.5% increase in sales and a PE multiple of 58 times.

Note: The stock market is engaged in a complete session on Saturday, January 20, and will be closed on Monday, January 22, due to a public holiday in Maharashtra state to mark the inauguration of the Ram Temple in Ayodhya city.