High inflation is affecting volume growth, that's the key takeaway from research and brokerage house Motilal Oswal on India's leading fast-moving consumer goods (FMCG) company Hindustan Unilever.
However, the brokerage house maintains ‘Buy’ rating with a target price of ₹2,500 per share. The stock does not feature among our top picks at present, it added.
An average of 37 analysts polled polled by MintGenie have a ‘buy’ call on the stock.
In a note dated March 21, 2022, Motilal Oswal said, “The management had called out increasing raw material pressures in its third quarter (3QFY22) result call. The Ukraine crisis has further exacerbated cost inflation, particularly in palm oil and crude-related RMs like LAB, soda ash, and packaging costs, all of which have seen a sharp sequential inflation. A greater impact of the Ukraine crisis will result in higher inflation in coming months.”
On the demand side, the research firm made some key points. It said, sharp inflation is affecting consumption. “Cumulative growth, for categories in which Hindustan Unilever is present, was flat with a high single-digit volume decline in Jan-Feb’21. The company performed relatively better.”
It further said, high inflation is affecting volume growth, adding “The customer is tightening their purse strings on premium purchases.”
On the positives, the company noted, demand for laundry and dish wash was good.
Based on this, Motilal Oswal said, “Hindustan Unilever's earnings have underperformed that of peers in recent quarters owing to: a) a higher proportion of the Discretionary/OOH portfolio at 15-20% of sales, and b) steep commodity cost inflation in its three largest categories – Soaps, Detergents, and Dish Wash. Both these negatives continue to be at play with further material cost increases and delayed recovery in the growth in premium products."
Earnings growth will bounce back to mid-teen levels once the above- mentioned worries ebb. However, uncertainty remains over the next couple of quarters, the note further said.
“Nevertheless, the structural story for Hindustan Unilever remains intact,” Motilal Oswal said.
Note: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.