Shares of Hindustan Unilever Limited (HUL) dropped 2% in early trade on Friday, in sync with broader market, after its September quarter earnings failed to impress D-Street. Investors remain concerned about the FMCG major’s muted volume growth, which was below expectations due to subdued rural performance and increased competitive intensity from small players in select categories.

Extending losses for the fifth straight session, HUL shares opened lower at ₹2,520, down 1.1% against the previous closing price of ₹2,547.85 on the BSE. In the first three hours of trade so far, the FMCG heavyweight declined as much as 2.2% to ₹2,490.65.

At the time of reporting, HUL shares were down 1.9% at ₹2,501.45, with nearly 0.5 lakh shares changing hands over the counter. The market capitalisation stood at ₹5.87 lakh crore.

At the current level, the shares of HUL trade 10% lower than its 52-week high of ₹2,768.50 on July 7, 2023. It hit a 52-week low of ₹2,393 on March 15, 2023.

HUL shares have underperformed BSE benchmark Sensex and S&P BSE FMCG index in terms of returns in the last one year. The stock has given a negative return of 3.4% in the past 12 months as compared to 10.7% and 17.5% growth in Sensex and FMCG index, respectively. In the calendar year 2023, HUL shares lost 2.6% as against 7.5% and 17.3% rise in Sensex and FMCG index, respectively.

In a post market release on Thursday, HUL reported a profit of ₹2,717 crore, up 3.86% from ₹2,616 crore in the year ago period. The sales rose 3.53% to ₹15,027 crore in Q2FY24, from ₹14,514 crore a year ago. The board of HUL also declared an interim dividend of ₹18 per share for the year ended March 31, 2024.

On the operating front, EBITDA rose 9% 3,694 crore in Q2 FY24 as compared to ₹3,377 crore in the corresponding period last year. The margin increased by 130 basis points (bps) to 24.6% from 23.3% in the same period last fiscal. The operating profit climbed 9% to ₹3,425 crore versus ₹3,129  crore in the year ago period.

Segment wise, home care business registered a volume growth of 3%, while beauty & personal care and foods & refreshment division grew 4% each during the quarter under review.

Analysts view on HUL Q2 results

Post Q2 results, ICICI Securities maintained ‘Add’ rating on HUL shares with a price target of ₹2,800, an upside potential of 10% from the current market price. While JM Financial retained ‘Buy’ rating with a 12-month price target of ₹2,880 per share, Prabhudas Lilladher maintained a ‘Hold’ rating with price target of ₹2,786 apiece.

According to ICICI Securities, UVG (underlying volume growth) of 2% was below its estimates. Gross margin expanded by 690 bps YoY to 52.7% as raw material cost pressure continued to decline meaningfully for most of the commodities except milk, coffee, and barley.

“Volume growth recovery was below expectations due to subdued rural performance and increased competitive intensity from small players in select categories,” it says in its report.

JM Financial in its report says that HUL’s Q2 earnings were in line with expectations, but volume growth of 2% was a further step-down versus earlier levels. Rural recovery remained gradual with market volumes still lower as compared to two year ago levels. “The hope for a gradual volume recovery in rural areas remains, given reversal of inflation, higher infrastructure spends by government, and expectation of tailwinds from a good festive season. On the other hand, the consequence of a weaker monsoon and the volatility in crude-oil prices are the key watch-outs at this stage.”

“We expect HUL’s stock to be under some pressure on the back of the weak Sep-Q report, and absence of clear volume-trigger at this juncture,” it adds.

Meanwhile, Prabhudas Lilladher has cut earnings per share (EPS) by 0.9% and 2.1% for FY24 and FY25, respectively, citing sustained pressure on volumes; lower pricing element to support growth & ward off competition from local/regional players; and marginally higher tax rates.

“Rural volumes continue to improve (on low base) supported by easing inflation, higher job participation & govt thrust towards capex. While long term growth story led by lower penetration and superior value proposition remains intact, near term growth challenges seems likely,” it says in a report.

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