MOFSL bullish on this FMCG giant as steady macros seen to aid gradual volume recovery in FY25

Domestic brokerage Motilal Oswal Financial Services (MOFSL) in its annual report update on the FMCG major Hindustan Unilever (HUL) said that it offered insights on the company's key focus areas aimed at building a sustainable growth model. These include its focus on  distribution expansion, digital initiatives, ramping up the alternate channel and Shikhar app.

Amid macro challenges that affected the company’s operational performance over the last two years, it continues to focus on capital efficiency. Its cash flow from operation adjusted to tax rose by 23 per cent YoY to Rs 12,300 crore  with a two-year CAGR of 17 per cent, and FCF increased by 21 per cent YoY to Rs 10,900 crore with two- year CAGR of 17 per cent led by working capital efficiency, noted MOFSL report.

Subdued demand in rural markets led to moderate performance in FY24

In the previous FY24, the company delivered moderate performance with revenue growth of 2 per cent to Rs 61,900 crore amid a challenging business environment. This is as cumulative inflation remained elevated.even though there was gradual deflation in commodity prices across its portfolio after an extended period of high inflation. Also, uneven rainfall led to subdued agricultural output, affecting rural demand. 

The company delivered underlying volume growth of 2 per cent in FY24. Gross margin improved 430 bp to 51.9 per cent, while EBITDA margin inched up 30bp to 23.7 per cent. PAT grew 1 per cent YoY to Rs 10300 crore in FY24. Further it generated ROE of 20 per cent and ROCE of 28 per cent in FY24. 

Maintain market leadership in 85 per cent of its business

The company has sustained market leadership in more than 85 per cent of its portfolio, driven by the top 19 brands, each generating over Rs 1,000 crore in annual sales. 

Gradual volume recovery anticipated; co. well positioned among peers

The brokerage also believes that HUL is the best prepared among peers in terms of technology and e-commerce strategy to deal with potentially significant disruptions going forward. Furthermore, as the company’s volume growth has bottomed out and steady macros are seen to boost volume growth, MOFSL is bullish on HUL and has reiterated its 'buy' stance with a target of Rs 2,900, based on 55x FY26E EPS, implying an upside of over 17 per cent.

The company’s wide product basket and presence across price segments should help the company achieve a steady growth recovery, it added. Besides, segment-wise, there company sees  scope for a turnaround in part of beauty and personal care (BPC) and Foods and Refreshment  (F&R).

HUL's stock price performance 

The stock over the last one year has given a negative return of over 6 per cent as against Nifty FMCG index that has zoomed over 9 per cent during the same time period.