CMP: Rs. 569.45; Buy at Rs. 565-570 levels.
Total Shares: 216,19,18,098
shares; Promoters: 113,48,49,460 shares – 52.49 %; Total Public holding:
102,70,68,638 shares – 47.48 %; Book Value: Rs. 15.88; Face Value: Rs. 1.00;
EPS: Rs. 15.62; Div: 650 %; P/E: 35.85 times; Ind. P/E: 44.19; EV/EBITDA: 39.74
Target for 6 month - 1 year: Rs. 600.00; STOP LOSS – Rs. 480.00; Market
Cap: Rs. 1,23,110.42 Cr; 52 Week High/Low: Rs. 580.45 / Rs. 325.20.
Total Debt: Rs. ZERO Cr; Enterprise Value: Rs. 1,24,980.48 Cr.
HINDUSTAN UNILEVER LTD: The Company was founded in 1931
and is based in Mumbai, India. The company was formerly known as Hindustan
Lever Limited and changed its name to Hindustan Unilever Limited in 2007. Hindustan Unilever Limited, is a Fast Moving
Consumer Goods (FMCG) company – it provides home and personal care products;
foods and beverages in India and internationally. The company operates in 7
business segments. The company offers soaps and detergents, including soaps,
detergent bars, detergent powders, detergent liquids, and scourers; and
personal products - such as oral care, skin care, hair care, deodorant, talcum
powder, and color cosmetic products, as well as Ayush services. It also
provides beverages - including tea and coffee; foods, such as Atta (flour),
salt, and bread; culinary products comprising tomato and fruit based products,
and soups; and ice creams, such as ice creams and frozen desserts. In addition,
the company offers chemicals, such as glycerin and fine chemicals; agri
commodities; and water purifiers, as well as exports marine and leather
products. HUL has over 35 brands spanning 20 distinct categories. Its portfolio
of brands includes the brand names like - 3
Roses, Annapurna, Brooke Bond, Taaza, Bru, Kissan, Knorr, Kwality Wall’s,
Lipton, Modern, Red Label, and Taj Mahal brand names; personal products under
the Aviance, Axe, Breeze, Clear, Clinic Plus, Closeup, Dove, Fair & Lovely,
Hamam, LEVER Ayush Therapy, Lakme, Lifebuoy, Liril 2000, Lux, Pears, Pepsodent,
Pond's, Rexona Soap, Sunsilk, and Vaseline brand names; and home care products
under the Active Wheel, Cif, Comfort, Domex, Rin, Sunlight, Surf Excel, and Vim
brand names and water purifiers under the brand name Pureit.
Investment Rationale:
HUL’s management has successfully turned around the
business in the past two years through focusing on volume growth, cost
rationalisation and faster innovation. From a situation where the company was
growing below market average and losing market share in 2009, HUL has
consistently delivered near-double-digit volume growth for nine quarters. This
has come despite the company raising blended prices by 10 % YoY to pass on raw
material cost inflation. HUL’s Management
has delivered a strong and sustainable turnaround. HUL’s strong
investments in innovation starting from FY10 have imparted volume growth
momentum to the business. In a departure from the company’s strategy over the
2000's on rationalising brand portfolio and aligning to the parent’s global objectives,
HUL has become more focused on the local market, improved agility (means the capability of rapidly & efficiently adapting to changes) in responding
to competition and is churning out a significantly larger number of
innovations. Over 60 % of HUL’s large portfolio was touched by innovation in
FY12, with a clear focus on premiumisation in established categories and growth
in new categories such as deodorants and face washes. HUL’s see a moderate
scope for margin expansion as the key raw materials for HUL such as LAB, palm oil
and packaging have not seeing an absolute decline in prices besides having seen
a moderation in YoY inflation. Given the volume growth momentum, HUL continues
to gradually increase prices which should help inch up gross margins in FY13.
Also, the strong revenue growth is imparting operating leverage to the
business. However, post 1H FY 13, HUL will not have the benefit of a weak base;
this could limit margin expansion. In the period of 2000-08, HUL had actually
curtailed its portfolio of brands in categories such as soaps, detergents and
tea, de-focusing on ‘local brands’ while increasing investments into global
brand platforms. However, given the local nature of competition in these three
categories, this led to market share losses in many states where HUL
de-focussed on regionally strong brands. This is changed now, with management
focusing on every part of their portfolio. Thus, local brands such as Sunlight,
Hamam, Breeze, Ruby and Lakme have also seen innovation activity in the past
two years. In FY12, the company took a strong jump in its rural distribution
(which was already the best in the industry) by expanding its coverage by three
times. With this, HUL’s total direct retail coverage is over 20 Lakh outlets,
compared with 5 -11 lakh outlets of its key competitors. Another positive for HUL is
that the high-margin in personal products business has seen very stable growth in
the range of 15 %- 20 % over the past nine quarters, driven by strong double-digit
volume growth.
Outlook and Valuation:
As an organisation, HUL has become more
agile in responding to competitive moves and volatility in input costs, which
is needed to remain competitive in the market. HUL’s Soaps & Detergents
revenue growth over the past few quarters has been well above the average growth.
While drivers like premiumisation should continue to drive a 10 %-15 %
sustainable growth in these categories, most of the listed companies are
reporting growth well in excess of these levels. One of the reasons is that
unbranded products or local brands in these categories are losing share as they
become uncompetitive in a high input cost environment. Also, the high cost of
capital and the volatility in currency could be impacting small businesses much
more than larger companies.
However, the share gain of the branded players
should stem at some stage, leading to moderation in revenue growth. Soaps and
detergents continue to be an important part of HUL’s profits. For FY12, the segment
constituted 47 % of revenue and 36 % of operating profit. Thus, any moderation
in growth here could be a key risk for HUL. These categories, being the two
largest FMCG categories, are also highly susceptible to down-trading by
consumers as they form large parts of the consumer wallet within FMCG. Here is the 13 year short details on HUL's Financial -
HUL has traded at an average one-year forward P/E of 24.3x over the past 10 years, which includes the period of eight years between CY03 and FY11 when the company delivered less than 3 % earnings CAGR, significantly below its listed peers. Even during the peak of the price war with P&G from 2004 to 2006, the stock traded at an average one-year forward P/E of 24.2x. Hence, HUL should trade at a premium to its valuation during these periods given the high visibility of mid-teens earnings CAGR over the next three years. The turnaround affected by management over the past two years was based on investments made in innovation and distribution, which could reap benefits over the next two-three years. Hence, the valuation of HUL comes at 30x one-year forward earnings, which is a 20 % premium to the stock’s 10-year trading average. At the CMP of Rs. 569.45, the stock is trading at 5.62 x FY2012E and 5.22 x FY2013E EV/EBITDA, the stock is trading at a P/E of 37.81 x FY13E and 32.22 x FY14E respectively. Earnings per share (EPS) of company for FY13E and FY14E are seen at Rs. 15.06 and Rs. 17.67 respectively. One can buy HUL with a target price of Rs. 600.00 for a minimum of 6 month to 1 year.
| YEAR | EPS (in Rs.) | P/E (X) | BV (in Rs.) | Div/Sh (in Rs.) |
|---|---|---|---|---|
| 1999 | 4.86 | 46.29 | 9.55 | 2.90 |
| 2000 | 5.95 | 34.68 | 11.30 | 3.50 |
| 2001 | 7.46 | 29.97 | 13.82 | 5.00 |
| 2002 | 8.04 | 22.60 | 16.62 | 5.16 |
| 2003 | 8.05 | 25.42 | 09.71 | 5.50 |
| 2004 | 5.44 | 26.37 | 09.50 | 5.00 |
| 2005 | 6.40 | 30.82 | 10.47 | 5.00 |
| 2006 | 8.41 | 25.74 | 12.34 | 6.00 |
| 5 YR | EPS (in Rs.) | P/E (X) | BV (in Rs.) | Div/Sh (in Rs.) |
|---|---|---|---|---|
| 2007 | 8.73 | 24.50 | 06.61 | 9.00 |
| 2008 | 11.46 | 20.72 | 09.45 | 7.50 |
| 2010 | 10.10 | 23.63 | 11.84 | 6.50 |
| 2011 | 10.58 | 26.89 | 12.19 | 6.50 |
| 2012 | 12.46 | 32.89 | 16.25 | 7.50 |
HUL has traded at an average one-year forward P/E of 24.3x over the past 10 years, which includes the period of eight years between CY03 and FY11 when the company delivered less than 3 % earnings CAGR, significantly below its listed peers. Even during the peak of the price war with P&G from 2004 to 2006, the stock traded at an average one-year forward P/E of 24.2x. Hence, HUL should trade at a premium to its valuation during these periods given the high visibility of mid-teens earnings CAGR over the next three years. The turnaround affected by management over the past two years was based on investments made in innovation and distribution, which could reap benefits over the next two-three years. Hence, the valuation of HUL comes at 30x one-year forward earnings, which is a 20 % premium to the stock’s 10-year trading average. At the CMP of Rs. 569.45, the stock is trading at 5.62 x FY2012E and 5.22 x FY2013E EV/EBITDA, the stock is trading at a P/E of 37.81 x FY13E and 32.22 x FY14E respectively. Earnings per share (EPS) of company for FY13E and FY14E are seen at Rs. 15.06 and Rs. 17.67 respectively. One can buy HUL with a target price of Rs. 600.00 for a minimum of 6 month to 1 year.
| KEY FINANCIALS | FY12 | FY13E | FY14E | FY15E |
|---|---|---|---|---|
| SALES (Rs. Crs) | 21,735.60 | 25,722.81 | 29,965.11 | 34,912.91 |
| NET PROFIT (Rs. Crs) | 2,691.41 | 3,255.35 | 3,820.24 | 4,517.14 |
| EPS (Rs.) | 12.45 | 15.06 | 17.67 | 20.90 |
| PE (x) | 41.20 | 34.10 | 29.10 | 24.60 |
| P/BV (x) | 31.60 | 27.10 | 23.20 | 19.80 |
| EV/EBITDA (x) | 33.20 | 26.90 | 22.60 | 19.00 |
| ROE (%) | 87.20 | 85.50 | 85.90 | 86.80 |
| ROCE (%) | 87.48 | 92.91 | 94.43 | 95.67 |
I would
buy HINDUSTAN UNILEVER LTD with a price target of Rs. 610 for minimum of 6 months to 1 year. As I always say, I am a long term
believer in markets & I do respect the markets and will keep a strict stop loss of Rs. 480.00 on every purchase as it is the for the 1 year target.
*As the author of this blog
I disclose that I do hold HINDUSTAN UNILEVER LTD in my investment portfolio.
READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE
