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HUL, Dabur: Analysts bet on rural-focused FMCG stks amid Covid-19 lockdown

It must be noted that fortunately rural India has not been impacted that much by the lockdown as the urban areas have been
Stock market has witnessed a brutal sell-off over the past one month owing to fears of serious economic dislocations in the wake of Coronavirus (Covid-19) pandemic. Stocks across-the-board, including the marquee large-cap names, have fallen like a pack of cards. However, there are a few outliers that have outperformed the market amid this crisis. Fast-moving consumer goods (FMCG) major Hindustan Unilever (HUL) is one such example. The stock hit a fresh lifetime high of Rs 2,324.45 on the BSE on Wednesday. 

In the past month, HUL shares have gained 5 per cent (as of Tuesday's close) while those of Nestle (India) have risen 1 per cent. HUL and GlaxoSmithKline(GSK) Consumer touched all-time highs on Tuesday, a day before the merger of the latter into HUL became effective. READ ABOUT IT HERE

On the other hand, other consumer names such as ITC and Britannia have fallen 12 per cent each while Marico and Dabur have declined 10 per cent each during the period.

So, what's behind HUL's stellar performance?

According to analysts, HUL's product basket and attractive valuation are the two major reasons that have caught investors' fancy in this weak market - and despite the demand - supply issues that the health scare brought with it. The company has a complete basket dedicated to food items and daily-use products, including soaps and sanitisers, which are in great demand these days.

"Everybody is buying and stocking more and more food items and daily-use products which the company sells", says Sudip Bandyopadhyay, Group Chairman at Inditrade Capital. Further, it must be noted that fortunately rural India has not been impacted that much by the lockdown as the urban areas have been. Since HUL has a good penetration in rural areas, it is boosting investor sentiment.

That apart, from the valuation perspective, HUL looks attractive, say analysts. "If one compares Nestle (India) with HUL, the former's valuation is significantly higher. Additionally, in the current situation when the investors are preferring safety in terms of balance-sheet, earnings, and all other qualitative factors, HUL scores," explains Amnish Aggarwal, head of research at Prabhudas Lilladher.

In comparison, ITC is a completely different company as around 85-90 per cent of its revenues come from tobacco/cigarette business and since tobacco doesn't come under "Essential Goods", the stock is under a lot of pressure as the company's cigarette factories across the country have been shut. ITC does have few food products but those are not so profitable, says Bandyopadhyay.

During the October-December period (Q3FY20), ITC had posted a 4.5 per cent rise in its pre-tax profit at Rs 5,049 crore. Despite persistent weakness, especially in rural markets, backed by market liquidity conditions and illicit trade in the cigarettes channels, the company had logged a five per cent increase in its revenue from this vertical at Rs 5,311 crore with a six per cent increase in profitability at Rs 3,756 crore. READ ABOUT IT HERE 

 
Investment strategy

Analysts believe the rural economy will start reviving much before the urban India recovers. Also, all the government measures and schemes such as MGNREGA and PM Kisan Samman Nidhi Yojana are expected to benefit rural India. Moreover, there has been a strong rabi season, which should also prop-up rural demand. Therefore, those companies which have good rural chains and are supplying consumer goods will continue to do well for the next one-two quarters.

HUL is still a good bet at the current levels as the upside trend is likely to continue, says Bandyopadhyay. Dabur, Marico are other stocks that the analyst is bullish on.

Analysts at ICICI Securities, too, are positive on HUL and Dabur. The brokerage notes that the lower remittances to rural India from urban India led by the migration of labour will cause temporary consumption slowdown. Also, out of the total income of farmers, agri income (30 per cent) will be better considering a strong rabi season 2019-20. The brokerage, however, believes that higher allocation to schemes targeted at farmers / rural laborers such as PM Kisan and NREGA income will increase the disposable surplus in the hands of consumers.

As far as ITC is concerned, it is advisable to stay away, for now, analysts say.


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