HUL gains 3% post steady Q2 nos; brokerages see over 12% upside in 12 mths

Shares of Hindustan Unilever (HUL) advanced as much as 2.74 per cent to Rs 2,070 on the BSE in the intra-day deals on Tuesday after the company reported steady numbers for the quarter ended September 30. 

At 01:09 pm, the stock was ruling at Rs 2,056.50 apiece on the BSE, up 2.07 per cent. The scrip was trading close to its all-time high of Rs 2,102 touched on September 23. The benchmark S&P BSE Sensex, on the other hand, was trading 234 points or 0.63 per cent higher at 38,454.23 levels. 

The FMCG bellwether on Monday reported a 21.2 per cent year-on-year (YoY) growth in net profit to Rs 1,848 crore for the July-September quarter (Q2) of FY20. Growth was aided by lower corporation tax, which came into effect last month. Volume growth, however, for Q2 remained the same as reported in the June quarter, coming in at 5 per cent, though some analysts said it was ahead of their estimates of 4 per cent for the period.

It was the third straight quarter when HUL posted single-digit volume growth. In the March quarter, volume growth was 7 per cent.

Sanjiv Mehta, chairman and managing director, admitted that rural growth had decelerated further in Q2 versus the June quarter, when urban growth was on a par with rural growth. READ MORE

Maintaining a 'buy' rating on the stock with the target price of Rs 2,250, Edelweiss Securities says, "Hindustan Unilever’s Q2FY20 revenue growth of 6.7 per cent YoY came in line, while EBITDA and PAT spurt of 21 per cent and 21.5 per cent YoY, respectively, surpassed our estimates. Despite near trough rural growth (mere 0.5x urban), volume grew 5 per cent YoY on a base of 10 per cent, implying resilient urban growth."

The only negative, as per the brokerage firm, was the delay in HUL-GSK merger approval. 

Among business highlights, HUL's Home care segment grew 9.4 per cent YoY led by premiumisation and increase in penetration leading to 151 basis points (bps) EBIT margin expansion. Beauty & personal care segment rose 5.3 per cent YoY. Foods & refreshments’ revenue rose 8.4 per cent YoY with EBIT margin falling 139 bps YoY on account of higher raw material cost.

In its concall, the company said rural growth was 0.5x urban for the sector in the three-month period. Prices were reduced by 4-6 per cent in mass end personal wash products in 2QFY20, and a similar reduction is likely to be taken in premium products like Dove and Pears in 3QFY20. On a net basis, nearly 3 per cent effective price reduction is likely in 2Q and 3Q across soap brands.

Revenue was in line, while the margin surprised yet again, wrote analysts at Motilal Oswal Financial Services (MOFSL) in a results review note. "Once we incorporate the GSKCH merger (final approvals awaited), there could be 8-9 per cent addition to earnings per share (EPS) in FY21, which means that the stock is trading at nearly 45.3xFY21 v/s 49.4x as it appears currently. Given its best-of-breed earnings visibility and by far highest return ratios, the premium valuations are justified. On a target multiple of 50x Sep’21E EPS, we derive a TP of Rs 2,265," they said. The brokerage has 'Buy' call on the stock. 

Stock performance

On a year-to-date (YTD) basis, shares of HUL have outperformed the market by surging 11 per cent as against a 4.43 per cent increase the benchmark Nifty. The Nifty FMCG index has remained flat (up just 0.15 per cent) during the period, ACE Equity data shows.

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