HUL stock has touched its 52-week high levels of Rs. 1,902 on Tuesday 8th March 2022. The company stock has been underperformed in the recent past. Also, in the first 3-months of the calendar year 2022, the stock has delivered negative returns of more than 16%. So, let’s discuss the reasons behind the underperformance of the HUL Stock, and should you invest or not at this point in this stock in this article as we move ahead.
Reasons behind fall in HUL Stock Price:
1) Premium Valuation:
- The stock of HUL was trading at a premium valuation where the PE of the stock was hovering around 75-80, which has now fallen to the levels of 50-55.
2) Index Selling:
- Major outflows by Foreign Portfolio Investors (FPIs) or Foreign Institutional Investors (FIIs) in the Indian Stock Market are done in Index stocks where the volume of these stocks is quite large.
- Since HUL stock is part of both the major indices- Sensex & Nifty, the index selling has affected the stock.
3) Raw Material Inflation:
- The Company as well as the overall Fast-Moving Consumer Goods (FMCG) is reporting an unprecedented inflationary pressure across its raw material commodities like Palm Oil, Crude Oil Derivatives, Sunflower Oil, and Food Commodities (ex.: Wheat, etc.).
- The ongoing war between Russia & Ukraine has escalated the inflationary situation of these commodities.
4) Margin Pressure:
- Raw material inflation has a direct impact on the Operating margins and profitability of the company.
5) Price Hikes:
- To compensate for the raw material inflationary situation and to maintain the standard margins level, the company opts to pass on the price to the consumer.
- Still, the company cannot take price hikes across its products/brand categories according to the inflation in the raw material. For Example, if a raw material price has increased by around 40%-50%, then the company cannot take here price hikes of the same levels on its products. Hence, steep price hikes are not possible for the company.
- Therefore, the company takes calibrated price hikes to offset the inflation impact on margins.
- The price hikes do not appear to be a major issue in urban areas for the company, but they can be an issue in a rural area. And hence, here company proceeds with Grammage Cuts to offset the inflationary impact. Grammage Cut refers to a reduction in the volume of the products. Ex. Earlier in 1 Rs. Sachet of Clinic Plus (Product of HUL), the volume was 15 ml, but post grammage cut, the volume will be reduced to the level of 10 ml. Here, the price will not be increased.
6) Rationalization of Ad Spends to maintain Margins:
- To offset the inflation impact, the company can also step for the rationalization of Ad spending to maintain its margin levels.
- Ad Spends is a great source of revenue driver, gaining market share, maintaining product image, etc. and any kind of cut in this spend can prove to be negative for the company. But in a situation like this, where the raw material inflation is at a peak level, the FMCG companies sometimes opt for some reduction in their Ad Spend.
Some Favorable Factors for the Company:
1) Pressure Tactics:
- Big Companies during such times as inflationary environment, pandemic situations- Covid-19, etc., play out pressure tactics against small manufacturers, where the small companies cannot take aggressive price hikes.
2) Price Hikes:
- By not hiking price or taking calibrated price hike actions, it helps the big FMCG companies like HUL, the company gets in a strong position to gain market share from the other player, small companies, or from the unorganized market.
Performance of HUL:
- The 10-Year, 5-Year, 3-Year, and 1-Year CAGR Profit Growth of the company is around 11.1%, 14%, 15.3%, and 19.6% respectively.
- The growth in the profitability has improved for the company. The expansion in the operating profit margins has played out well for the company.
Valuations of HUL:
- HUL Stocks is currently trading at a PE Ratio of around 50-55 similar to the levels of PE of the company at pandemic levels (during and after March 2020).
- In March 2020, the level of PE was around 60, and currently, it is at 53. This indicated that the stock PE has fallen more than the pandemic levels.
- The 1-year, 3-year, and 5-year MedianPE of HUL Stock are 69.24, 69.44, and 66.87 respectively. The Current Stock PE is around 53, which shows the stock is trading at discount.
- From a 10-year viewpoint, the stock is still trading at a little premium valuation as the 10-year median PE of the Stock is around 47.
What are the Future Prospect of the FMCG Sector and HUL:
From an earnings viewpoint, FMCG Sectors appears to be a sector with the longest earnings visibility as these sectors are not affected by new-age tech disruptions. Hence, big players like HUL are there for a very long period not in a year, but terms of decades. HUL has been reporting strong volume growth and standard operating profit margins which prove its premium valuations over other stocks. From the valuation comfort, the HUL Stock looks quite attractive and hence one should keep this stock on their radar.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.