HUL shares are red hot as investors look past recent hiccups

• The consumer pharma major Glaxosmithkline Consumer Healthcare GSK’s decision to dump its holding in Hindustan Unilever (HUL) sparked a selling spree in the last one week.
  
• Societe Generale, which is a French investment company, bought 12.9 million shares of HUL.
  
• And that led to a 3% rally on Friday at 11:40 am, according to Bombay Stock Exchange (BSE).
  
• The company witnessed a 7% decline in sales volume between Jan-March 2020 and that came as a shocker for investors.

The investors in India’s largest consumer staples company Hindustan Unilever (HUL) have recovered from a short-lived panic attack.

Aside from disappointing earnings, the consumer pharma major Glaxosmithkline Consumer Healthcare’s (GSK) decision to dump its holding in HUL, sparked a selling spree in the last one week. With its merger with GSK, Hindustan Unilever was set to become the biggest food company in India.

However, as the HUL share price plunged, a new investor, Societe Generale, which is a French investment bank, was waiting to lap up GSK’s offer. Investors are ready to pay higher prices now, given the future growth expectations. And that led to a 3% rally on Friday at 11:40 am.


Societe Generale bought 12.9 million shares of HUL priced at ₹1,902. This came after GSK dropped its 5.7 per cent stake in the Indian fast-moving consumer goods major, amounting to nearly ₹25,480 crore (nearly $3.3 billion).


‘HUL shares can rally another 18% in the next one year’

HUL has always been one of the most valued companies in India, based on price-to-earnings ratio ⁠— a valuation metric that indicates the price that an investor is willing to pay for every rupee of profit earned by the company.

Based on that, the recent sell-off has made India’s fast-moving consumer goods giant even more attractive at these levels. Therefore, another investment bank Macquarie has put HUL as one of the top ten stocks that investors should buy with a target price of ₹2,500 (an implied gain of over 18% compared to the closing price on May 5 when the report was compiled).


The earnings debacle that led to the recent correction in HUL

India only shut down its economy on March 25; shops were open for nearly the entire quarter except for the last week. Even after that, people were hoarding, panic buying essentials every few days as the lockdown continued to extend, and is now scheduled to end on May 17. Several HUL products fall under essentials like sanitizers and hand wash in its brands.

However, there was a larger downtrend as the weakness in demand became increasingly clear.

In the last one month, the shares of India’s largest fast-moving consumer goods major slumped by 16% — since April 8. A lot of it has to do with a 7% decline in sales volume between Jan-March 2020 and that came as a shocker for investors.


If one week's lockdown could cause a 7% fall in volume growth, investors fear about what six weeks can do. Investors in HUL lost over $3.5 billion as the stock slumped over 5% on May 4 and 5.

Now that the expectations of a weak performance is priced in, and the fact that investors are looking for safe bets at a time when the economy and market is in the grip of a crisis, the shares of HUL seem to be attracting buyers again.

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