Hindustan Unilever (HUL), one of India's largest FMCG companies, witnessed its share price decline by over 5% on Thursday after the company's Q2FY25 results did not meet market expectations. HUL's revenue from operations for the second quarter rose marginally by 2% year-on-year (YoY), reaching ₹15,319 crore, compared to ₹15,027 crore in the same period last year.
This modest increase in revenue reflected a slight improvement, supported by the company's 3% volume growth during the quarter. Despite these numbers, the company's share price took a significant hit in the share market investment sector, falling as much as 5.78% to ₹2,504.15 on the Bombay Stock Exchange (BSE).
EBITDA and margin contraction
The company also reported a drop in its earnings before interest, tax, depreciation, and amortisation (EBITDA). HUL's EBITDA for the quarter fell by 1.3%, from ₹3,694 crore in Q2FY24 to ₹3,647 crore in Q2FY25. Furthermore, the EBITDA margin narrowed by 80 basis points (bps) YoY to 23.8%. This contraction in EBITDA margin may have also contributed to the negative sentiment surrounding HUL in the share market investment sphere.
HUL's ice cream business separation
In addition to its Q2 results, HUL's board announced a decision to separate its ice cream business by December 2024. The decision came after a recommendation from an independent committee. HUL's ice cream segment is considered a high-growth, high-investment, but low-margin business, and this separation is aimed at enabling more focused growth.
This strategic move, however, did not prevent the dip in its stock price within the share market investment context, as investors remained cautious following the overall results.
Rural recovery and urban slowdown
According to Nuvama Institutional Equities, HUL's long-term growth trajectory appears promising, driven by a gradual recovery in rural markets and pricing growth expected to return in the second half of FY25 and FY26. Despite these long-term growth expectations, the firm has marginally reduced its earnings per share (EPS) estimates for FY25 and FY26. It still holds a 'Buy' call on HUL's shares, raising the target price to ₹3,395 from the earlier ₹3,375.
HUL's ability to capitalise on a potential rural market recovery is seen as a key factor in its future performance in the share market investment sector. The urban slowdown, however, continues to be a challenge for the company in the near term.
Price increases in key segments
In its Q3FY25 outlook, HUL has taken price increases in key segments such as tea. However, for FY25, the company anticipates that overall pricing growth will remain in the low single digits. HUL's efforts to invest in enhancing its consumer value proposition and driving the premiumisation trend could provide long-term benefits in the share market investment space.
Nuvama Institutional Equities believes that HUL's focus on premiumisation could help sustain its growth trajectory despite the current challenges in the broader market.
Outlook from brokerage firms
Several brokerage firms have weighed in on HUL's stock performance following its Q2FY25 results. Nuvama Institutional Equities maintains a positive outlook, with its revised target price of ₹3,395 and a 'Buy' rating. This is based on the expectation that rural recovery and pricing growth will bolster HUL's performance in the share market investment sector over the next few years.
Similarly, Antique Stock Broking has forecasted a gradual improvement in HUL's overall performance. The firm expects the rural market recovery, aided by a well-distributed monsoon and government stimulus, to support HUL's future growth. However, Antique Stock Broking has also revised its EPS estimates downwards by 1% for FY25-27E, reflecting a more cautious outlook.
The brokerage has maintained a 'Hold' recommendation on HUL, raising its share price target to ₹2,666 from ₹2,574 earlier.
Commodity inflation and cost-saving initiatives
Rising commodity prices continue to pose a challenge for HUL. However, Antique Stock Broking expects the company to maintain its operating margins through various cost-saving initiatives and by focusing on its premium portfolio. This approach could mitigate some of the pressures faced by HUL in the share market investment market. The firm estimates that HUL will deliver a sales and earnings compound annual growth rate (CAGR) of 8% over FY24–27E.
Final thoughts
HUL's Q2FY25 results may not have met expectations, leading to a sharp decline in its share price within the share market investment sector. Despite the challenges, analysts remain cautiously optimistic about the company's long-term growth, driven by a potential rural recovery and pricing increases in key segments. Investors should carefully assess these factors before making any share market investment decisions regarding HUL shares.
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