Shares of FMCG major Hindustan Unilever surged around 3 per cent at closing on Friday after the company’s Q3 numbers exceeded street expectations. Most brokerages remain bullish on the stock as they expect the company to overcome near-term headwinds.

The stock closed at ₹2,322.20 on the BSE, up 60.60 points or 2.68 per cent, despite the overall mood of the market being bearish. It opened at ₹2,282 as against the previous close of ₹2,261.60. The stock touched an intraday high of ₹2,333.05 and a low of ₹2,250.60. Its market cap stood at ₹5,45,622.08 crore at closing.

Stellar numbers

The company on Thursday reported an 18.6 per cent year-over-year growth in consolidated net profit to ₹2,297 crore for the quarter ended December 2021, compared to ₹1,937 crore during the same period last year. Sequentially, net profit grew 5.3 per cent q-o-q, up from ₹2,181 crore in Q2 FY22. HUL’s revenue from operations during the quarter grew 10.25 per cent to ₹13,196 crore.

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While domestic consumer growth remained steady at 11 per cent during the quarter, the underlying volume growth stood at 2 per cent, compared to 4 per cent last quarter as rising inflation and increase in commodity prices continue to be major headwinds. Volumes in the rural market slipped into the negative category. 

Brokerages bullish

ICICI Securities maintained its Add rating on the stock with a price target of ₹2,500.

“The task (ahead) is a tough one – eye on mid-to-long-term while navigating multiple (near-term) challenges. Firstly, supply-side inflation (of such scale) amidst (demand) slowdown is a tough situation to be in – any price hikes (RM inflation-led) will have a visible impact on demand (volume),” it said in a report.

“Secondly, we believe there are multiple intermediate markers which leaders like HUL are expected to deliver on steady premiumisation and category development; enhance digital capabilities including e-commerce salience, D2C brands and improved reach (Shikhar). As price-lever will have its limitation on guarding margins, the intent is to further drive cost efficiencies. Balance between cost rationalisation and investing for the future will be (again) key,” it added. 

Yes Securities and Centrum Broking also gave the stock an Add rating with target price of ₹2,587 and ₹2,628, respectively. 

Motilal Oswal Research gave the stock a Buy rating at a target price of ₹2750 with a 22 per cent upside, as it sees earnings returning to the 15-17 per cent CAGR witnessed in the pre-Covid period.

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“Two factors have held back HUVR’s performance over the past few quarters, namely higher material cost pressures v/s other staples, especially with all its three largest categories (skin cleansing, fabric wash, and beverages) witnessing sharp input cost increases, and a slower than expected recovery in the high margin discretionary portfolio (including growth of around 5 per cent in Q3-FY22) where HUVR is over-indexed. Both of these are likely to put pressure on earnings over the next two quarters as well, especially given the steep increase in Dec 2021 as well as some impact of the third Covid wave in Q4 (albeit temporary) on the discretionary portfolio,” it said in a note.

However, “On the positive side, its operating margin base is favourable for the next three quarters; continued market share gain in 75 per cent of its portfolio is encouraging; the high margin discretionary portfolio will return to normal; and potential increase in government allocations towards the rural sector in the upcoming budget could provide a much-needed fillip to demand,” it said.

IDBI Capital also maintained Buy rating on the stock with a revised target price of ₹3,098. Edelweiss also retained a Buy rating on the stock with a target price of ₹2,960.

Emkay, however, gave the stock a Hold rating with a target price of ₹2450.

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Margin concerns

“Management commentary indicates continued moderation in demand trends, more accentuated in rural markets. With inflation further inching up in Q4, management expects margins to remain under pressure,” Emkay said in a note. 

“HUL has taken significant price hikes across its portfolio, which should limit the margin hit ahead. We expect HUL to maintain margins at around 25 per cent in the near term. Despite recent underperformance, the overall growth outlook remains muted amid moderation in rural demand and high inflationary pressures,” it added.