HUL stock rating: Brokerages give thumbs up, premium valuation after Q1 results surprise

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Published: July 22, 2020 5:04 PM

The Unilever unit has been able to normalize distribution but has refrained from saying demand has recovered given near-term uncertainties around pandemic restrictions, the analysts wrote.

Cost cuts and synergies from the GSK acquisition will expand margins going forward, the analysts wrote, maintaining a buy rating.Cost cuts and synergies from the GSK acquisition will expand margins going forward, the analysts wrote, maintaining a buy rating.

The market-beating financial performance by Hindustan Unilever Ltd. in a quarter marred by lockdowns and staggered reopenings in India has drawn praise from analysts.

Market pundits are betting that growth in the nutrition business and a recovery of rural demand in Asia’s third-biggest economy will boost sales for the local unit of Unilever NV. Meanwhile, the defensive appeal of the company’s stock should help support its high valuation, they say.

Hindustan Unilever’s food and beverage business saw double-digit growth in the June-ending quarter due to strong in-home consumption and the merger of GlaxoSmithKline Plc’s Indian consumer business, while beauty products took a hit.

Here is what analysts tracking the stock are saying:

Nutrition Boost
“The steady performance of the nutrition business in a challenging environment shows its importance in further ‘recession proofing’ Hindustan Unilever’s portfolio in the future,” UBS Group AG analysts Sunita Sachdev and Abhishek Banerjee wrote in a note. “We believe this could be a catalyst for the stock.”

The company’s sales growth of 4% in the quarter was aided by the addition of GSK’s portfolio of nutrition drinks, the UBS analysts said, maintaining their buy rating on the stock.

The Unilever unit has been able to normalize distribution but has refrained from saying demand has recovered given near-term uncertainties around pandemic restrictions, the analysts wrote.

Rural Demand
“We expect Hindustan Unilever to be a key beneficiary of the rural demand recovery,” Edelweiss Financial Services Ltd. analysts including Abneesh Roy wrote in a report. “Although Covid-19-induced lockdowns will affect near-term volumes, we expect volumes and earnings to bounce back once things normalize.”

Cost cuts and synergies from the GSK acquisition will expand margins going forward, the analysts wrote, maintaining a buy rating.

Premium Valuation
Jefferies Financial Group Inc. has raised its earning estimates for Hindustan Unilever, citing the strong June quarter performance.

The company’s stock has climbed 20% in 2020, while the benchmark S&P BSE Sensex Index is down about 8%. Hindustan Unilever is trading at 63 times earnings estimates for this fiscal year, above its five-year average of 53 times.

“Premium valuations should sustain” in the context of Covid-19 impact and the defensive nature of the company’s business, analysts Vivek Maheshwari and Kunal Shah wrote in a note.

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