HUL, Nestle India: BofA Securities downgrades 2 FMCG stocks, shares fresh targets

BofA Securities has downgraded two FMCG stocks namely Hindustan Unilever Ltd (HUL) and Nestle India Ltd amid demand softness and cost pressures. The foreign brokerage cited modest business trend and rich stock valuation, as it downgraded Nestle India's rating to 'Underperform'. For HUL, it suggested 'Neutral' rating, as it sees a slow path to normalisation.  

HUL: Target price: Rs 2,330

BofA said trends for HUL may pick up from the recent lows, but the growth and margin recovery seems to be far slower than what it had imagined earlier, It noted that general softness in consumption continues with the urban India slowdown and rural recovering only gradually. 

"Moreover importantly, we see a substantial part of HUL's portfolio (35 per cent) impacted by either cyclical/inflationary pressures (tea and soaps) or specific category issues (nutrition, mass skin) that weigh on overall performance. 

BofA Securities said the management's efforts to invest in new high growth segments and channels is positive, but may not be enough to swing the needle for such a large business near-term. 

"Further, limited pricing in recent months despite pockets of high inflation reflect the tough operating environment. We now build in a modest Q4FY25 (flat volume; 1.5 per cent pricing growth - a tad lower than Q3) with margin pressures," BofA Securities said.
 
It suggested a fresh target price of Rs 2,330 on HUL from Rs 2,540 earlier. Its valuation is pegged at 15 per cent discount to the stock's last 5 years average reflecting the softer outlook 

"The recovery in coming quarters may be key in determining where the stock's rich valuations settle," it said.

Nestle India : Target price: Rs 2,140 
 
BofA Securities believe a combination of soft demand trends, cost pressures and aggression from multiple players make the operating environment challenging and should affect Nestle India near-term. 

"Pricing can remain a key growth driver amidst sharp inflation in commodities like coffee and cocoa that impact 30 per cent of portfolio. We expect some volume recovery (on low base) hereon, but overall growth remains modest," BofA Securities said.

With a rapidly changing consumer landscape and competitive dynamics, Nestle India would have to tightly balance growth & margin mid-term, BofA said as it feels the operating margin is capped and can move a tad lower. 

"Nestle's valuation is elevated in context of the growth outlook and its peer group - we downgrade to 'Underperform' from 'Neutral' lowering estimates and PO," BofA said.

The foreign brokerage suggested a revised target of Rs 2,140 on the stock against 2,315 earlier.