NEW DELHI: Two of India’s top consumer facing businesses- Hindustan Unilever (HUL) and Asian Paints- are facing pressure in Dalal Street despite reporting growth in bottom-line and top-line for the quarter ending December 2022 (Q3FY23).
Share prices of Asian Paints fell nearly 3% on Friday to R 2,785 after witnessing sharp sell-off in the closing hours of Thursday session. The stock has corrected nearly 10% in the last one month. According to stock market experts, the chemical major’s results are below the street expectations. Increasing competition and expensive valuations also remain a cause for concern for investors.
Asian Paints on Thursday reported a net profit of R1,097 crore for Q3FY23,up over 6% year-on-year. The company’s revenue from operations rose about a percent to R8,636 crore during the quarter. Brokerage firm ICICI slashed its target price for the stock and said that lower-than-expected urban recovery and potential execution challenges in newcategories are some of the many triggers that could lead to a structural correction in its high earnings multiple.
Analysts at Jeffries, meanwhile, retained its price target but trimmed FY23-25 revenue estimates by 4-5% citing a drop in volumes. They said that the entry of Grasim in the paint business is one key event to monitor. “Asian Paints remains a strong play in the Indian paint industry. It has demonstrated a strong track record, delivering 15% revenue CAGR and 20% EPS CAGR over the past 15 years, and it has remained the market leader for over half a century. However, 61x FY24 P/E already captures this,” said the brokerage. FMCG major HUL has a different story. While it also faces demand andinflationary pressure, it was its announcement to increase in royalty and central service fees (by 80 basis points) to parent firm Unilever plc, which acted as a major dampener for the stock.
Shares of HUL fell nearly 4% on Friday to close at R2,548.35 on the BSE. “HUL’s increase in the payment of royalty and technical fees to its parent Unilever could have an adverse impact on the company’s operating margins and earnings, till the time it expands its margins to a similar extent or introduces new products from Unilever’s stable to compensate for the hit,” said Deepak Jasani, Head of Retail Research, HDFC Securities. Brokerage firms at large have a buy or accumulate call on the HUL stock.
Impact on operating margins
HUL’s increase in the payment of royalty and technical fees to its parent Unilever could have an adverse impact on the company’s operating margins and earnings, till the time it expands its margins to a similar extent or introduces new products from Unilever’s stable.