Q1 results: High valuations factor in strong show by HUL, stock gains

The share price of Hindustan Unilever (HUL) hit a new high of Rs 1,779 intra-day on Monday, before closing 0.73 per cent higher at Rs 1,753.85 on the BSE.

The higher close was in anticipation of a strong performance for the June 2018 quarter (Q1).

The results, which were declared post market hours, undoubtedly suggest that the Street’s expectations have been met. But considering the high stock valuation, experts believe that the stock already factors in a strong performance over the next two years. 

“The strong volume growth can be attributed to an uptick in the rural demand and strong traction in new launches. With the rural consumption improving, we expect the strong volume growth momentum to sustain in the coming quarters,” says Kausthubh Pawaskar, senior analyst at Sharekhan.

Additionally, the reported gross profit margin also expanded by 197 basis points year-on-year to 53.4 per cent in Q1 and comparable operating profit margin went up by 100 basis point, mainly owing to better product mix and cost savings initiatives. Analysts were expecting the latter to increase by 100-110 basis point, so the Q1 number does meet expectations. Though crude oil and currency inflation did hurt, prices of some other inputs such as palm oil were benign. Continued focus on product premiumisation and cost savings also helped, and are likely to lend support to profitability. 

The key risk, however, is if oil and currency volatility increase. The management, too, expects some impact of crude oil and currency volatility. So, the margin trend will be interesting to watch out for.

Moreover, the high valuation of about 62 times based on analysts’ FY19 earnings estimates (one of the highest valuations in the FMCG space) suggests that the HUL stock already factors in strong profit growth in the medium-term. Unless the company can deliver positive surprises, further upsides appear limited.