Mumabi: Shares of India’s largest listed consumer packaged goods company Hindustan Unilever Ltd on Tuesday fell nearly 3% after at least eight brokerage firms downgraded the stock citing rich valuations despite the company reporting better than expected quarterly numbers.
The stock hit a low of Rs 1,701.30 a share and declined as much as 3% in intraday trades. At 10.30am, the scrip was trading at Rs 1,711 on the BSE, down 2.5% from its previous close. So far this year, the Hindustan Unilever stock has gained 25%.
Brokerage firms Antique Broking, Axis Capital, ICICI Securities, Deutsche Bank, Citi, Nomura, Prabhudas Lilladher and Jefferies India have downgraded the stock and reduced its target price.
Hindustan Unilever reported a net profit of Rs 1,529 crore in the June quarter, up 19.2% from a year ago. Revenue rose 11% to Rs 9,487 crore. A Bloomberg poll of 15 analysts had estimated profit at ₹1,540.3 crore and revenue at ₹9,669.1 crore.
Sales volume rose 12%, year on year, while EBITDA margins expanded to 23.7%. This was the third consecutive quarter of double-digit sales growth for the Hindustan Unilever while EBITDA margins have consistently expanded in last seven years.
The improvement in EBITDA was on account of lower cost of goods sold, judicious pricing and savings, and refunds from goods and services tax and excise duties.
“While HUL delivered a steady Q1 helped by a low base, we believe the volume growth trajectory is likely to taper as the base normalizes and overall demand pick-up remains modest. Given rising input prices and competitive pressures, it would be difficult to maintain the pace of margin expansion. The stock is up 54% in the last year and given the rich valuation of 54x FY20 PE, we downgrade the stock to Hold on unfavourable risk-reward,” said Jefferies India in a note to its investors.
Jefferies expects that the pace of margin expansion will slow down considerably and has kept its target price for Hindustan Unilever at Rs 1,680 a share.
India’s macroeconomic condition is worsening due to rising crude oil prices, which pose risks of accelerating inflation and a wider fiscal deficit. Retail inflation is at a five-month high in June at 5% against 4.87% in the preceding month.
“While the results were strong and the outlook remains encouraging, we believe that valuations at above 2SD of the long-term trading range are quite expensive. The recent stock price run-up has been much ahead of the business fundamentals, in our view. Hence, we downgrade the stock to Reduce,” said Nomura in a note to its investors. The brokerage firm has cut its target price for Hindustan Unilever to Rs 1,500 a share from Rs 1,751 earlier.
Antique Stock Broking has downgraded the Hindustan Unilever stock to Hold from buy and cut its target price by 4.3% to Rs 1,649 a share. Axis Capital reduced its rating to Hold from Buy and kept its target price at Rs 1,720 a share. ICICI Securities cut its rating to Sell from Reduce and kept its target price at Rs 1,464 a share. Deutsche Bank also downgraded the stock to Hold from Buy and set its target price at Rs 1,800 a share. Citi has lowered its rating to Sell from Neutral and kept its target price at Rs 1,660 a share. Prabhudas Lilladher has downgraded the stock to Hold from Accumulate and kept its target price atRs 1,703 a share.
Of the analysts covering the stock, 23 have a Buy rating, 16 have a Hold rating, and 7 have a Sell rating, according to Bloomberg data.