HUL upside maybe limited as margins face cost pressure

ET Intelligence Group: Hindustan Unilever‘s (HUL) shares came under pressure during Tuesday’s trading session, plunging to a 52-week low of ₹2,019 on the BSE despite a 13-quarter high revenue growth posted by the FMCG major for the June quarter. It ended the day at ₹2,023.2, recording the steepest daily fall of 7% since March 23, 2020 when it had declined 8.8%. The sharp fall reflects concerns over the mounting input cost pressure, which resulted in a 40 basis point year-on-year contraction in the Ebitda margin at 23%.

Read more: HUL shares slide over 6% after weaker-than-expected Q1; PAT dips 3% to Rs 2,673 crore on one-time credit

The stock has failed to earn returns over the past five years, falling by over 12% during the period. It currently trades at a trailing price-earnings (P/E) multiple of about 32, significantly below the historical three-year, five-year and ten-year average valuations of 52-60. While the management expects FY27 to be better than the previous year in terms of sales and volume growth, sustained input-cost inflation and its impact on future margin expansion is likely to overshadow the earnings beat in the medium term thereby limiting the upside potential of the stock despite cheaper valuation.

HUL’s year-on-year revenue growth of 10% in the June quarter was led by the home care business, which delivered 14% underlying sales growth (USG), highest in three years, with double-digit growth across fabric wash and household care. However, operating margin (EBIT margin) contracted to 17% from 20% a year ago, due to cost pressure. The Beauty & Wellbeing remained HUL’s most profitable segment, delivering a margin of 28%. The business delivered 12% USG, highest in at least 10 quarters. Growth was broad-based across hair care, skin care and digital-first brands such as Minimalist.

Personal Care was the laggard as prolonged palm oil inflation affected volume performance. The company offset this pressure through premiumisation, with Dove, Pears and Bodywash delivering strong double-digit growth, highlighting a gradual shift towards higher-value personal care products. Despite subdued growth, the segment margin improved to 20% from 19% a year ago. The Foods division continued to deliver steady growth, driven by coffee and nutrition, though its share in HUL’s overall business fell to atleast 10 quarter low of 20.3%. However, its margin expanded to 20% from 16% a year ago. HUL expects broader category participation, stronger rural demand, premiumisation and rapid expansion of quick commerce to support its performance in the current fiscal year.