Why HUL Shares May Continue to Struggle

HUL shares traded near the bottom of the 50-share Nifty on Tuesday, a day after witnessing their biggest fall in nearly four years.

India's biggest FMCG firm had reported September quarter earnings yesterday. HUL's results met estimates, but forecast of continued weak demand and consumer spending spooked investors, analysts say. HUL fell more than 2 per cent today, following a 5 per cent drop yesterday.

Gaurang Kakkad, vice president of Religare Capital Markets told NDTV that HUL's volume growth has stuck in a 4-6 per cent range over the last 7-8 quarters. In the September quarter, HUL reported a 5 per cent volume growth.

"Volume growth was in line with estimates, but there was no beat in topline or margins... According to the management, over next 2-3 quarters HUL's volume growth will remain in the 4-6 per cent range, which is a disappointment," he added.

According to Mr Kakkad, HUL's profitability in the coming quarters is unlikely to rise sharply even if input costs continue to decline.

"If input cost continues to decline, competitive intensity in the sector will go up as many players from the unorganized sector will come in... That will result in advertisement and promotion spend going up. So, the entire benefit of low input costs will not come to the stock," he added.

Mr Kakkad also added that HUL is unlikely to grow quickly in rural areas from where it derives 50 per cent of its sales. "The allocations for NRGES and other social schemes have come down in the budget, so rural spending is unlikely to be strong," he added.

Religare has a sell call on HUL with a target of Rs 660. HUL's valuations are at 34 times its FY16 earnings, which makes the stock costly, the brokerage says.

CLSA also maintained its sell call on HUL (target Rs 600) citing high valuations and moderate volume growth.

As of 2.13 p.m., HUL traded 1.2 per cent lower at Rs 713.40 and underperformed the broader FMCG sub-index on the BSE, which traded flat.