Hindustan Unilever hits over 3-month low; stock falls 12% in 2 months

Localised lockdowns may affect near-term volumes, but Edelweiss Securities expects volumes and earnings to bounce back once the situation normalises.
Shares of Hindustan Unilever (HUL) were under pressure, hitting an over three-month low of Rs 2,042, down 3 per cent on the BSE in the intra-day trade on Monday. The stock of the fast-moving consumer goods company (FMCG) was trading at its lowest level since May 29, 2020.

In the past two months, HUL has underperformed the market by falling 12 per cent after it reported a mixed set of numbers for the quarter ended June 30, 2020 (Q1). In comparison, the S&P BSE Sensex has risen 2 per cent during the period. The company paid a dividend of Rs 23.50, including a special dividend of Rs 9.50 per share since June.

While profit before tax (PBT) for the period fell 6 per cent year-on-year (YoY) to Rs 2,411 crore, the company's revenue increased 4.4 per cent YoY to Rs 10,560 crore, thanks to the merger of GSK Consumer nutrition brands with the companies. Excluding the GSK business, overall revenue declined 7 per cent in the quarter. Operating profit, however, fell 0.1 per cent to Rs 2,644 crore in Q1, while operating margins narrowed to 25 per cent from 26.2 per cent a year ago.

"Constraints continue due to restrictions in several parts of the country and the near-term demand outlook remains uncertain," the management had said while announcing Q1 results on July 21.

Analysts at Edelweiss Securities note that HUL’s stock has underperformed lately due to various factors such as a cut-back in out-of-home consumption (5 per cent of HUL’s portfolio, down 69 per cent YoY), the perception that HUL does not benefit from higher in-home consumption of food items, a sharper 45 per cent YoY fall in discretionary categories such as skin care, colour cosmetics & deodorants— with people confined indoors due to the lockdown, and pressure on gross margin (down 233bps YoY in Q1FY21) stemming from an adverse mix.

Localised lockdowns may affect near-term volumes, but the brokerage firm expects volumes and earnings to bounce back once the situation normalises. They expect premiumisation to sustain (albeit delayed) and hence expect better earnings growth.

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