HUL Q3 Results Review: Analysts Trim Earnings Estimate On Soft Near-Term Outlook

Shares of Hindustan Unilever Ltd. fell as brokerages lowered the consumer goods maker's earnings per share guidance and trimmed price targets to build in soft near-term outlook on demand recovery and sales growth.

The Surf Excel maker reported a marginal decline in revenue, while profit missed analysts' estimates during the quarter ended December. The miss on revenue and profitability was on account of price cuts taken to pass on the benefit of commodity deflation.

Volumes grew at 2%, the same pace as the preceding quarter and lower than 5% reported in Q3 FY23. A delayed winter, weak rural sales and competition from local players dented the expected pick-up in demand.

• Revenue fell 0.2% to Rs 15,567 crore (Bloomberg estimate: Rs 15,642.2 crore).

• Operating profit dropped 0.8% to Rs 3,666 crore (Bloomberg estimate: Rs 3,734.2 crore).

• Margin at 23.5% versus 23.7% (Bloomberg estimate: 23.9%).

• Net profit rose 1.1% to Rs 2,508 crore. (Bloomberg estimate: Rs 2664.5 crore).

The management did not share any outlook on volume growth, but said that the pace of demand recovery from here on would be determined by a rebound in rural income and winter crop yields. Pricing should remain in the negative zone in near-term, if commodity prices stay at current levels, translating to a muted revenue growth for fiscal 2024, it said.

In longer term, the company expects to see 4-5% pricing growth.

On a two-year CAGR basis, however, HUL’s volume grew 4%—higher than the industry volume growth of 2%, according to its investor presentation.

Analysts say that the management commentary on demand setting remains unexciting, as demand recovery remains a hope on the emergence of tailwind. They expect a rural recovery led by lower inflation, low base and better farm income expectations, while urban demand, especially in food categories, should take some more time to see the benefits of innovation and market development.

The only positive in the earnings was HUL's gross margin expansion of 401 basis points year-on-year to 50.6%. The company, however, ploughed back gains to increase ad spends, resulting in decline in Ebitda margins.

Ad spends rose 34% in Q3 and stood at 10.7% of net sales. With competitive intensity rising, HUL intends to maintain higher A&P spends.

Shares of the company fell as much as 3.25%, the lowest since Nov. 17, 2023, before paring loss to trade 2.96% lower at 10:51 a.m. This compares to a 0.3% advance in the NSE Nifty 50.

The stock has fallen 2.33% in the last 12 months. Total traded volume so far in the day stood at 2.1 times its 30-day average. The relative strength index was at 36.21.

Of the 44 analysts tracking the company, 25 maintain a 'buy' rating, 14 recommend a 'hold', and five suggest a 'sell', according to Bloomberg data. The 12-month analysts' consensus price target implies a downside of 12.16%.

Here's what analysts have to say about HUL's Q3 FY24 results:

• Reiterated 'buy' rating on the stock with a lower price target of Rs 2,805 apiece, implying a potential upside of 9.3%.

• Factoring in recent trends, the brokerage lowered earnings estimates by 2-6%.

• On a positive note, HUL has gained market share of 200 basis points since FY21, over the entirety of the commodity cycle.

• While pace of market share gain moderates in the near-term, HUL is likely to emerge stronger as the environment normalises.

• More than the (temporary) issue of local competition, a stronger rural recovery would be a major growth driver going forward.

• Besides the macro headwinds and inflation-led volatility, HUL's efforts on premiumisation, net revenue management and continued productivity initiatives may be key to drive an earnings uptick.

• Maintains 'buy' rating with a target price of Rs 3,105 apiece (earlier: Rs 3,210), implying a potential upside of 21%.

• The brokerage trimmed EPS estimates for FY24 and FY25 by 5% and 3%, respectively.

• HUL posted decent volume growth in home and personal care that was marred by a dip in food and refreshments.

• The price war in HUL’s popular segments, with new entrants entering the fray, could hit the company hard.

• With corrections in raw materials, competition from regional players pose some risk.

• Maintains 'add' rating on the stock, with a lower target price of Rs 2,700 per share, implying a potential upside of 5.2%.

• Capturing demand pressure, the brokerage has revised its topline expectations down by 3%, which led to a 3% cut in earnings. It is now 6-7% below consensus expectations for FY25 and FY26.

• Demand slowdown, competitive pressure, distribution stress, and rising royalty rates are likely to have an overhang on HUL’s valuations, it said.

• The stock’s valuations at 46 times for FY26, though factoring in near-term pressure, may see a derating if volume recovery remains elusive in FY25.

• Reinforcing general trade moat is now an added pressure, with changes in distributor margin structure.

• Downgrades the stock to 'reduce' rating, with a lower target price of Rs 2,668 apiece, implying a potential upside of 4%.

• As performance was below estimates, the brokerage has downward revised FY24, FY25 and FY26 earnings per share estimates by 5.4%, 5.1% and 5% at Rs 44.1, 48.8 and 54.5, respectively.

• Going ahead, volume growth would lead the value growth due to less opportunity for price hike.

• The FMCG industry demand trends are expected to improve, supported by urban demand, improving modern trade contribution and healthy premium portfolio contribution. HUL would continue to grow premium portfolio ahead of overall business.

• Price growth would remain marginally negative and HUL would focus on volume led growth going ahead.

• Maintains 'hold' rating on the stock with a target price of Rs 2,825 apiece, implying a potential upside of 10.1%.

• Expects gross margin recovery to continue, with commodity inflation continuing to moderate and premiumisation playing out.

• But Ebitda margin improvement will be tempered by the 80 bps, phased increase in royalty and a continued uptick in ad spends.

• The impact of pricing cuts implemented in soaps and personal care have started to reflect in the numbers, which should drive a gradual recovery in volume growth over next few quarters.

• Given the recent underperformance and initial signs of a volume recovery in few categories post pricing and marketing actions, the brokerage does not expect too much downside despite this weak growth delivery on both absolute and relative terms.

• But muted pricing should keep revenue growth muted in FY24.

• The brokerage slashed EPS estimates for FY24 and FY25 by 5% and 4%, respectively, to build in a slower recovery in both topline and margins.

• Key monitorables would be the timing of industry demand recovery, commodity price trends and competitor actions.