Stock corner: ‘Hold’ on HUL, confident on long-term growth potential

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Published: November 19, 2019 2:35:58 AM

E-com to be next growth driver for Indian FMCG: Rising middle class population, lack of strong distribution network in smaller cities/villages and significantly overcrowded condition of cities is resulting in the ever-increasing salience of e-commerce in Indian retail, even FMCG.

Stock corner, Hold, HUL, market news, FMCGWe gain greater confidence on HUL’s long-term growth potential; ‘hold’ rating reflects the requirement of lower multiples to turn more constructive.

HUL’s perspectives on e-commerce: HUL’s presentation on e-commerce at an investor conference had a wealth of information. It says e-com is the next growth driver for Indian FMCG, bringing its own set of opportunities and challenges. We believe that HUL stands out, in terms of being prepared to leverage this trend. We note HUL’s various initiatives to connect with consumers and kirana stores (mom-and-pop stores) at every level of the purchasing journey – e-com (Hamara Shop app helps consumers order online from Kirana stores), ordering (stores use Shikhar app to order from HUL’s distributors) and payment (POS terminals). We gain greater confidence on HUL’s long-term growth potential; ‘hold’ rating reflects the requirement of lower multiples to turn more constructive.

E-com to be next growth driver for Indian FMCG: Rising middle class population, lack of strong distribution network in smaller cities/villages and significantly overcrowded condition of cities is resulting in the ever-increasing salience of e-commerce in Indian retail, even FMCG. HUL says e-com contribution to FMCG is likely to increase to 6% by 2022 from 2% in 2017, growing at 45%+ CAGR over the period. The fact that 90% of additional online shoppers are from small towns (it estimates 4x growth in shoppers from tier 2 towns over 2018-22) provides a strong premiumisation tailwind. Faster online adoption in BPC (beauty & personal care) augurs well for HUL.

Opportunities aplenty: We note that rising share of e-commerce provides companies an opportunity to be more agile, service niche demand spaces and improve marketing efficiencies. That said, with fresh opportunities come fresh challenges: Rising e-com has resulted in numerous instances of successful ‘Indie’ brands, as entrepreneurs have identified consumer needs, built the right product/service offering and reached a meaningful scale.

There are other challenges as well – operational complexity, need for channel management, portfolio sustainability (ensure profitable growth) and brand protection against counterfeits.

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