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Positive on HUL, Nestle; eye on rural demand: Edelweiss Securities

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Abneesh Roy, ED-Institutional Equities, Edelweiss Securities, is positive on both Hindustan Unilever (HUL) and Nestle. Roy believes these are defensive stocks and discretionary came back with 5-6-7 percent price hikes, most of the concerns on gross margin and pricing power are therefore no longer a worry. However, he believes there is a need to monitor rural growth.

From the FMCG space, both Hindustan Unilever (HUL) and Nestle reported a largely decent set of numbers. Nestle’s numbers stood out, the company reported a 5.15 percent rise in net profit to Rs 617.37 crore for the third quarter ended September 2021.The company, which follows the January-December financial year, had posted a profit of Rs 587.09 crore in the same period a year ago. While HUL reported 8.9 percent year-on-year rise in net profit to Rs 2,187 crore for the quarter ended September 30. The company’s revenue came in at Rs 12,724 crore for the quarter under review. To discuss the earnings and the sector in detail, CNBC-TV18 caught up with Abneesh Roy, ED-Institutional Equities, Edelweiss Securities.
First up, he said the headline numbers were up to their expectations. “Some of the industry data which was coming in about FMCG growing 20-30 percent, we thought that was quite optimistic. For Nestle, in the different category growth, most of them have been in double-digits. However, EBITDA margin compression for both HUL and Nestle has been quite limited. HUL saw just 46 bps kind of an EBITDA margin compression and Nestle also, hardly 85 bps.”
Roy further added that these companies have cut down on the advertising intensity a bit. They are however, quite aggressive in terms of promotions.
“So, some of the froth in terms of valuation has come down and for HUL, it is down around 11 percent from peak, so maybe 2-3 percent correction can happen on a bad day. But these are defensive stocks and discretionary came back with 5-6-7 percent price hikes, most of the concerns on gross margin and pricing power are behind us. However, we will need to monitor rural growth,” said Roy.
According to him, actual rural growth has been robust but Nielsen is pointing towards a big slowdown on the rural front. “We do not think there is going to be a big slowdown, but urban growth clearly will revive. Therefore, would keep a watch on rural demand but definitely out-of-home consumption, discretionary consumption will see a good comeback. So, positive on both HUL and Nestle,” he said.
When asked if he was worried about HUL’s miss in terms of volume growth and if price hikes might impact them, Roy said, “The price hikes are about 7 percent and these are daily consumption items, not high-ticket items. Secondly, HUL itself has got a big discretionary portfolio for skincare and health. So, if you analyse the numbers, the discretionary segment for HUL is still seeing a decline of 2 percent, so that should come back very strongly in Q3 and Q4.”
“With regard to volume growth- sanitizers, hand washes, etc., did disappoint and packaged food items like sauce and jams, tea definitely disappointed, So if you dissect the numbers, most part of HUL and Nestle have grown in high single digit to double-digits,” he said.
On Reliance Retail and Aditya Birla Fashion acquiring some premium brands, he said, “Definitely, retail stocks will see one of the highest growth, even on a very soft base because pent- up demand definitely has been there. Moreover, the acquisitions by Reliance and Aditya Birla Fashion of some of these luxury brands make a lot of sense since India is on the cusp of a very high growth in the premium and discretionary sectors. Second, for some of these brands, beyond the threshold, it's very difficult for them to expand because you need to invest in omni and e-commerce and expanding to so many cities, you will need the balance sheet strength. So, I think it's a brilliant strategy by Aditya Birla Fashion and Reliance Retail to acquire all these premium brands and they can definitely scale-up much faster when they will be adding these in their ecosystem.”
 
For the entire conversation, watch the video
 
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