Stock Markets – Best & Worst of Times

“It was the best of times, it was the worst of times. It was the age of wisdom, it was the age of foolishness. It was the epoch of belief, it was the epoch of incredulity. It was the season of light, It was the season of darkness. It was the spring of hope, it was the winter of despair.”

This piece from “A Tale of Two Cities” by Charles Dickens, written in 1859 aptly sums up, if only allegorically, the state of the capital markets in India today. With a vibrant IPO market, many new stars appear on the market firmament burning brightly, while others, who despite having stood the test of time are dimming. Are they destined to decay and sink into the oblivion of a black hole or is there a possibility of a turnaround? Following are just three instances where the well known bluechips have hit or are trading close to their 52 week lows, even as the stock markets are roaring. Digging deeper into their financials might throw up interesting possibilities.

1. HDFC Bank: HDFC Bank is the largest private sector bank in India with an extensive network of over 8,000 branches. The lender has a high market share (15-20%) in most retail loan categories like unsecured retail, vehicles, and even in mortgages post its merger with HDFC Ltd. Between 2019-2023, the advances have grown around 2x, at a 5-year compounded annual growth rate (CAGR) of 18.9%. The NPAs of the bank have remained stable in the range of 0.3-0.4% from the financial year 2018, the lowest in the industry. However, none of this has helped the stock price. Over the last year, while the broad market index jumped up by 22% since January 2023, the stock of HDFC bank has fallen by over 10%.

HDFC Bank Financial Snapshot (2019-2023)

Source: Ace Equity

HDFC Bank is currently facing setbacks, including delays in reaping merger benefits and reduction in liability impacting its stock. Key factors include a miss in net interest margins (NIM) due to increased fund costs, elevated provisions, and a decade-low growth in earnings per share (EPS) in Q3, collectively contributing to the downward trend in shares. Since the December 2023 quarter results announcement, the share price has experienced a nearly 14% decline. It is trading around Rs 1400 to 1450, close to its 52-week low of Rs 1,363. Investors are worried that the bank would need to play the deposit pricing game to garner higher volume of deposits, thus shrinking its margins and dampening profitability. Moreover, the anticipated cut in repo rates has added to the pessimism. However, while the short term worries remain, the long-term story of the lending major remains intact. One swallow doesn’t make a summer.

• Asian Paints: Asian Paints, established in 1942, is  India’s largest paint company, renowned for its wide range of products including varnishes, enamels, and lacquers. The company operates in 15 countries with 26 production sites globally, serving customers across 60 nations under various brand names like Apcolite and SCIB. However, recent concerns over heightened competition with Grasim Industries entering the decorative paints segment with its Birla Opus range have led to a correction in the stock price. Despite the strong performance record, the stock is trading around Rs 2800, close to its 52-week low of Rs 2706. The stock has been moving within a narrow range, following the release of the quarter ending December 2023 results. The biggest cause for concern for the paint makers has been its Rs 10000 crore capex by Grasim Industries which has already tied up with major advertising firms to highlight its new range of paints. It is also likely to exploit pre-existing group distribution network for offerings like Birla White and UltraTech Cement. The anticipation of intensified competition has investors rattled as it is expected to impact both volume growth and margins for paint manufacturers, including Asian Paints.  However, Asian Paints has strategically diversified into non-paint businesses over the past decade offering a comprehensive home decor solution. From modular kitchens to sanitary ware and furniture, the company caters to diverse customer needs. Well, one could also take a hedge by betting on Grasim, the redoubtable rival in this instance!

Asian Paints Financial Snapshot (2019-2023)

Source: Ace Equity

Additionally, it is investing in eco-friendly paints and enhancing its technological capabilities through strategic acquisitions, such as acquiring a majority stake in a speciality chemical and nanotechnology player. While Grasim emerges as a serious contender in the paint sector, Asian Paints’ diversified approach and technological advancements coupled with the likelihood that the growth in the paint market per se, may still ensure that it will remain the great compounding machine that it has proved to be in the past.

• Hindustan Unilever: Hindustan Unilever (HUL), part of the Unilever Group, is India’s leading Fast Moving Consumer Goods (FMCG) company with a vast portfolio of over 44 brands spanning 14 diverse categories such as fabric solutions, home and hygiene, skin care, and foods. It enjoys widespread adoption, with nine out of ten Indian households using its products. In a competitive landscape featuring multinational, domestic, and regional FMCG firms, HUL holds either the top spot or a strong second position in most categories it operates in. Its portfolio targets various market segments, including premium, mid-price, and economy, setting it apart from competitors focused solely on premium or mass markets. HUL boasts one of India’s finest distribution setups, with an extensive distribution network comprising over 4,500 distributors and 8 million (m) retail outlets. Moreover, its revenue skew towards health and hygiene segments provides a relatively advantageous position compared to peers. Despite a stronghold in the market, the stock price has been volatile in the past year. At present, it is trading around Rs 2250, close to its 52-week low of Rs 2238. This underperformance comes on the back of poor quarterly performance. On the basis of nine months ending December 2023, the company reported a dismal 2.9% and 2.4% growth in revenues and net profit, respectively. On a quarterly basis, the company reported a 0.5% dip in sales and a 5.6% dip in net profits. HUL faced challenges with negative realisations in its home care and beauty & personal care segments. Increased competition in detergent bars affected home care, while declines in skin cleansing products impacted beauty & personal care. Volumes declined in foods and refreshments too, due to consumer shifts to lower-priced tea brands. The rural slowdown and active local competitors contributed to weaker growth. Margin miss occurred across segments, particularly in-home care, with margins declining YoY and below expectations. Management has taken action to address most corrections in-home care but not in foods and refreshments segment, especially tea.

Hindustan Unilever Financial Snapshot (2019-2023)

Source: Ace Equity

Looking ahead, the company anticipates gradual demand recovery, linked to rural income growth and winter crop yields, amid ongoing high competitive intensity. Negative pricing is expected due to current commodity prices. In fiscal 2025, HUL plans to split its beauty and personal care business to focus on driving growth and premiumisation in the beauty segment. It also has plans to hive off the Ice Cream business.

Apart from the examples given above, there are, of course, many more well known companies like UPL, Kotak Mahindra Bank, Page Industries, among others, which find themselves in a similar predicament. Their financials are waiting for the treasure hunters!