This large-cap FMCG stock fell 20% when Sensex surged 13%, brokerages say buy now; check target price

When benchmark index S&P BSE Sensex was struggling with extreme volatility, Hindustan Unilever (HUL) shares were seen surging as much as 36%. The rally in the FMCG giant was unlike anything that the domestic equity benchmarks were witnessing back in March and April this year as investors feared the spread of the novel coronavirus. However, the story has changed significantly since then. As Sensex staged a comeback, gaining 13% between April and June, HUL stocks tanked close to 20%. Despite this, brokerage firms are not giving up on this large-cap FMCG stock which many term as a play on India’s growth story. Currently HUL shares are trading at a price of Rs 2,115 per share.

Even before coronavirus entered India, the country was grappling with an economic slowdown that pushed discretionary spendings. HUL’s Personal Care category witnessed significant effects of the slowdown in the second half of the previous fiscal year. This was further nudged by the coronavirus. “Despite this, HUL reported another year of double-digit earnings growth, taking its earnings CAGR over the past 3 years to 16.6%, even as peers (many of whom are much smaller) witnessed revenue deceleration over the same period,” said Motilal Oswal in a research report. In its recently released annual report the FMCG giant highlighted that contribution of soap sales to HUL’s overall revenue has been declining but the company has been successful in offsetting the same with a surge in detergent sales. Detergent sales contributed 16% to HUL’s sales in financial year 2016, the same has inched up to 22.5% last fiscal, hinting at strong penetration by HUL.

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During these troubled times cost cutting has been the aim of a number of firms in India to tide over the crisis. HUL has already been focusing on cost, the company’s cost saving programmes delivered 7% of turnover as gross savings. “In FY20, HUL improved on its already dazzling RoE (82.8% in FY19) to 86.3% primarily due to 150bps YoY expansion in net profit margin,” said brokerage and research firm Edelweiss Securities in a research report. Edelweiss expects the firm to be the key beneficiary of the recovery in rural demand. The company is not just a play on rural demand but also on India’s growth story and the growing need for health and nutrition products. With an already established strong supply chain the firm ideally placed to benefit after short-term disruptions. 

Motilal Oswal said it remains positive on the stock for a medium-term perspective due to its robust earnings growth potential beyond the near term owing to its portfolio and execution strengths and for its RoCE levels that are well ahead of peers. “Moving our forecasts to merged numbers we value the company at 55x merged EPS, to arrive at a TP of INR2,400 and maintain Buy,” the brokerage firm said. HUL, although has seen the contribution from Beauty and personal care fall to 45% of overall revenue in the last few years remains to benefit from the upswing in categories such as health, hygiene and nutrition. Edelweiss Securities said the stock is trading at 53.8x FY22E EPS. the brokerage firm has BUY call on the stock with a target price of Rs 2,550 per share. 

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