ET Intelligence Group: For those on the Street scouting to cherry-pick quality stocks in the wake of the recent correction, HUL NSE -2.99 % is a strong temptation. The consumer goods behemoth’s second quarter performance was on expected lines with double digit volume growth for the fourth consecutive quarter on a base of 4 per cent volume growth a year ago.
Despite the company’s strong first quarter performance, analysts had downgraded its stock on concerns over stretched valuations and imminent risks to a sustained strong performance. The stock steadily weakened 13 per cent from its record high hit two months ago.
The latest quarterly performance, however, should allay valuation concerns. The stock is now trading at 59.2 times its earnings against the peak of 72.5. The company posted 10 per cent volume growth on a base of 4 per cent growth a year ago. The volume growth is expected to temper down as the high base effect kicks in from the current quarter.
HUL has made all the right moves — cutting advertising spend, reining in other expenses and passing on input cost inflation over to the consumers. While raw material cost as a proportion of revenues increased, the ad spend and other expenses as a percentage of revenues declined from the year-ago levels. The result: strong revenue growth of 12 per cent and 160 basis points improvement in ebitda margins despite headwinds of a depreciating rupee and escalated oil prices.
Strong brands, economies of scale and agile execution help HUL tide over macro-economic headwinds. It deploys several levers like price increases, moderating ad spends, acquisition of brands to improve its portfolio and changing revenue mix to mitigate headwinds. Rural demand continues to grow better than the urban one, a good sign for the consumer behemoth that earns nearly half its revenues from Bharat.
However, factors like weak rupee, escalated oil prices, increased competitive intensity as well as high base effect in the coming quarters may limit a major upside in the stock price. HUL also faces competition on the bourses from stocks of its peers like Britannia NSE -0.48 % and Nestle NSE -0.73 % that too are trading at similar valuations post the recent correction. Investors are in for a difficult choice in the consumer goods sector.
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