Will HUL’s Big Volume Bet Finally Break Its Losing Streak on D-Street?

Hindustan Unilever Ltd. (HUL), the FMCG giant, has been a laggard on D-Street. Not only has the company struggled to stay in the green territory, but has also declined by around 20 per cent from its 52-week high. While the broader FMCG sector’s underperformance partly explains this drawdown, things have been a bit more serious for HUL.

As per analysts, the broader FMCG sector declined by nearly 16 per cent before recovering 3 per cent from its trough, but HUL continues to trade 18 per cent below its peak.

A combination of macro factors, such as urban consumption slowdown, looming threat of D2C brand and rising commodity prices squeezing into margins, are already making things tough for the FMCG giant.

But for investors, a major question that has emerged now is whether they should bet on the company’s high-volume growth vision and buy the dip or wait for the Q3 picture to pan out.

Where's the hope for HUL?

Undoubtedly, the broader market has also witnessed a major downtrend in the last few weeks. However, among all the sectoral indices, the FMCG industry has been hit the hardest by this downtrend. This is largely owing to the slowdown in urban demand and rising food inflation.

And for that reason, things have been rough for the second-largest FMCG player (by market capitalisation). On year-to-date basis, shares of HUL have struggled to remain in the green territory, delivering a negative return of over 6 per cent on the National Stock Exchange.

Even the Q2 earnings report was more of a disappointing play for the company, as the net profit figure stood at Rs 2,959 crore, marking a decline of over 2.4 per cent.

Much of the hope is tied to the larger demand play now.

In a recent capital markets meeting, the company highlighted its focus on volume-driven growth. However, rising raw material costs and fierce competition in core areas like personal care, food and home care—thanks to the disproportionate FMCG growth—has made it tough for HUL to step up the game.

"HUL aims to post competitive volume-led growth and expects low-single digit price growth, given staggered price rise in tea and soaps. The company will target to maintain its Ebitda margin at current level. HUL has reiterated its goal of double-digit EPS growth in the long term, led by competitive turnover growth and moderate margin expansion," Elara Capital stated in its report.

The premiumisation bet of the company, while relatively sound, is facing hurdles in some segments. For this, the FMCG giant is planning to ramp up its presence in 100 key cities and has also boosted its media spending by nearly 40 per cent.

"Despite HUL’s tepid second-quarter earnings and the overall FMCG sector in general, we have a constructive view on HUL owing to its strong cash flow generation and presence across the full spectrum of FMCG products," said Manish Chowdhury, Head of Research at StoxBox.

Going forward, the recovery in rural demand owing to improved crop output and welfare schemes, growing shift to premiumization, and seasonal tailwinds due to the onset of winter bodes well for the near to medium term business performance, he further added.

Is it time to buy out the dip?

Consumption woes continue to threaten the overall outlook. However analysts believe that a reversal in the inflation trend and any interest cut by the central bank can bring back the growth feeding consumption demand. This will eventually give a growth push to the FMCG giant. "If the said assumption goes well, we can see HUL as well as the sector to recover," said Prashanth Tapse, senior VP of research at Mehta Equities.

But the rate cut hope seems far as of now, with many economists already predicting the pause to continue in the upcoming MPC meet.

"If we see any revival in the rural and urban demand, HUL can recover but at a slower pace," said Tapse.

Most of the brokerage firms have maintained a positive rating on the stock. ICICI Direct has increased its target price to Rs 2,950 and has maintained its ADD recommendation on the stock.

Elara Capital has given the stock an ACCUMULATE rating with a target price of Rs 2,720, indicating a 9 per cent upside from the current price.