HUL – SHOULD YOU BUY, SELL OR HOLD?
Following the recent correction, the valuation of Hindustan Unilever Limited (HUL) appears attractive, we recommend a Buy rating on the stock.
PRICE: 2603
BUY | Target 7,820 – 5 Years
VALUATIONS
| COMPANIES | MEDIAN PE | CURRENT PE |
| Nifty FMCG | 43.4 | 45.8 |
| HUL | 63.90 | 56.80 |
| ITC | 21.80 | 25.90 |
| Nestle | 79.60 | 63.00 |
| Varun Beverages | 60.40 | 98.00 |
| Britannia | 55.30 | 61.70 |
| Godrej Consumer Products Ltd | 50.60 | 73.70 |
| Dabur | 55.00 | 59.10 |
| Tata Consumer Products | 68.80 | 77.80 |
| Marico | 50.30 | 53.50 |
| Colgate Palmolive | 44.90 | 58.20 |
5 Year and 10 Year Median P/E of HUL is 64 and 61. Long Term Median P/E is 47.
Valuations are below HUL’s 10-year low P/E of about 56 at the moment.
HUL’s 3 Year Sales and PAT Growth is 10% and 8%, and Stock Price CAGR is -2%. Slow growth will continue for some time. Price CAGR will depend of P/E re-rating.
We believe any uptick in expected growth may trigger a rerating.
| FY24 | FY25 E | FY26 E | FY27 E | CAGR @3YR | |
| SALES | 61,896 | 67467 | 73879 | 80901 | 9% |
| PROFIT | 13,926 | 15179 | 16714 | 18404 | 10% |
| EPS in Rs | 44 | 48 | 52 | 58 | 10% |
| PE | 64 | ||||
| PRICE | 3699.4 | ||||
| CMP | 2502.40 | ||||
| Upside | 14% |
OUR CALL
BUY
HUL has an operating revenue of Rs. 61,896 Cr. in FY24. An annual revenue growth of 2.17% is not great, an Operating margin of 24% is great, ROE of 24% is exceptional. The company is debt-free and has a strong balance sheet enabling it to report stable earnings growth across business cycles. Recovery in rural demand, improvement in the consumption of mass product categories and sustenance of good growth in premium categories will help volume growth to recover in the quarters ahead. HUL has underperformed broader indices for last one year (corrected by 18% from a 52-week high).
Any consistent recovery in volume growth and margin expansion in the near term would act as a key trigger for valuations to improve going ahead.
Why is HUL’s share price declining?
|
COMPANIES |
MARKET CAP (IN CR) |
STOCK PRICE CAGR@3YR |
SALES |
|||
|
31-Mar-21 |
31-Mar-24 | CAGR@3YR | ||||
| Nifty FMCG | ₹ 24,37,197.00 | 15.5% | ||||
| HUL | ₹ 5,87,415.80 | -2.0% | 47028 | 61896 | 10% | |
| ITC | ₹ 5,30,413.00 | 25.0% | 49257 | 70881 | 13% | |
| Nestle | ₹ 2,47,403.00 | 14.6% | 14741 | 24349 | 18% | |
| Varun Beverages | ₹ 2,11,861.00 | 84.3% | 8823 | 16467 | 23% | |
| Britannia | ₹ 1,31,668.00 | 10.5% | 13136 | 16769 | 8% | |
| Godrej Consumer Products Ltd | ₹ 1,40,837.00 | 19.4% | 11029 | 14096 | 9% | |
| Dabur | ₹ 1,06,986.00 | -0.7% | 9562 | 12404 | 9% | |
| Tata Consumer Products | ₹ 1,04,807.00 | 20.0% | 11602 | 15206 | 9% | |
| Marico | ₹ 79,528.00 | 6.4% | 8048 | 9653 | 6% | |
| Colgate Palmolive | ₹ 77,869.00 | 20.3% | 4841 | 5680 | 5% | |
ITC was historically viewed as a “meme stock” because, despite consistently strong financial performance, it failed to deliver substantial returns to investors. A similar trend is now observed with Hindustan Unilever Limited (HUL). Over the past three years, HUL has achieved a compound annual growth rate (CAGR) of 10% in sales, yet its stock has yielded a negative return of -2% to investors.
| COMPANIES | MARGINS | |||||
| 31-Mar-21 | 31-Mar-24 | |||||
| GPM | OPM | GPM | OPM | GPM EXPANSION | OPM EXPANSION | |
| Nifty FMCG | ||||||
| HUL | 52.6% | 24.5% | 52.3% | 23.68% | -0.3% | -1.2% |
| ITC | 57.2% | 34.0% | 63.3% | 37.0% | 6.0% | 3.0% |
| Nestle | 58.5% | 25.8% | 56.8% | 25.6% | -1.7% | -0.1% |
| Varun Beverages | 55.8% | 17.0% | 56.3% | 22.9% | 0.5% | 5.9% |
| Britannia | 40.5% | 16.1% | 44.9% | 19.3% | 4.4% | 3.1% |
| Godrej Consumer Products Ltd | 55.8% | 20.1% | 56.1% | 22.3% | 0.4% | 2.2% |
| Dabur | 48.7% | 18.9% | 48.6% | 16.6% | -0.1% | -2.3% |
| Tata Consumer Products | 39.2% | 9.8% | 46.1% | 16.0% | 6.9% | 6.2% |
| Marico | 44.1% | 15.9% | 51.6% | 19.4% | 7.4% | 3.6% |
| Colgate Palmolive | 67.7% | 32.9% | 69.3% | 35.7% | 1.6% | 2.9% |
Even if we compare on OPM basis the HUL margins of 23.68% lies the 4th best among its peers.
| COMPANIES | Cash Conversion Cycle (In Days) | ||
| 31-Mar-21 | 31-Mar-24 | ROCE | |
| Nifty FMCG | |||
| HUL | -83 | -70 | 27% |
| ITC | 129 | 146 | 38% |
| Nestle | -7 | -24 | 169% |
| Varun Beverages | 30 | 38 | 29% |
| Britannia | -3 | -9 | 49% |
| Godrej Consumer Products Ltd | 11 | 16 | 19% |
| Dabur | 3 | 0 | 22% |
| Tata Consumer Products | 61 | 25 | 11% |
| Marico | 17 | 22 | 43% |
| Colgate Palmolive | -91 | -113 | 97% |
Despite having the second-best cash conversion cycle of -70 and a healthy ROCE of 27%, HUL has delivered a negative single-digit return. Given these conflicting signals, the question arises: should investors Buy, Sell, or Hold HUL?
First reason is the slowdown in its rural markets
The major growth trigger in HUL story has always been transitioning from the unorganised sector to organized sector and one of the main reasons for the drop in HUL stock price seems to be due to the slowdown in its rural markets, primarily lead by inflation.
The second reason is volume growth issues.
In the equation of Revenue= Price * Quantity HUL has been able to increase prices of the product and pass the inflation effect to the end consumer however the company has not been able to grow in volume terms because of lower consumer demand has gone down in past 3 years
With the government giving a push to revive rural growth
Union budget 2023-24 focused on reviving rural demand by boosting disposable income, allocation to farms, and higher fund allocation on rural infrastructure, connectivity, and mobility to create long-term jobs and the effect of this
Rural FMCG sales outpace urban growth in first quarter FY25: The rural growth rate, currently around 4.5%, is expected to rise to about 6% in the last quarter. Even if urban growth remains steady, overall FMCG growth is anticipated to exceed 5% in volume terms.
SUMMARY
Technically, HUL is undergoing a time correction, with its stock consolidating within a range over the past three years. We believe the worst is behind us, as HUL is performing well fundamentally. Both revenues and profits are on the rise, and the industry is growing at a rate of 7-9%. Given these factors, there is little doubt that HUL’s revenue will grow at least at the same rate as the overall economy, which aligns with the industry’s growth rate.
KEY FINANCIAL METRICS
| Key Financial Metrics | Mar-20 | Mar-21 | Mar-22 | Mar-23 | Mar-24 |
| Total Sales | 39,783 | 47,028 | 52,446 | 60,580 | 61,896 |
| Sales Growth (y-o-y) | 1.20% | 18.21% | 11.52% | 15.51% | 2.17% |
| Gross Profit Margins (%) | 52.22% | 49.49% | 49.35% | 46.06% | 52.36% |
| EBIDTA Margins (%) | 24.77% | 24.72% | 24.51% | 23.35% | 23.68% |
| EBIT Margins (%) | 22.25% | 22.44% | 22.43% | 21.48% | 21.72% |
| Net Profit Margins (%) | 16.96% | 17.00% | 16.93% | 16.71% | 16.60% |
| Earning per Share (in Rs.) | 31 | 34 | 38 | 43 | 44 |
| EPS Growth (y-o-y) | 16.96% | 17.00% | 16.93% | 16.71% | 16.60% |
| Dividend Per Share (in Rs.) | 24.94 | 40.51 | 34.01 | 39.01 | 42.01 |
| DPS Growth (y-o-y) | 13.63% | 62.39% | -16.05% | 14.71% | 7.69% |
| Key Financial Metrics | Mar-20 | Mar-21 | Mar-22 | Mar-23 | Mar-24 |
| Price to Earning | 73.74x | 71.46x | 54.21x | 59.44x | 51.77x |
| EV/EBITDA | 49.98x | 48.84x | 37.22x | 42.28x | 35.88x |
| EV/Sales | 12.38x | 12.07x | 9.12x | 9.87x | 8.50x |
| Price to Book Value | 10.33x | 11.57x | 9.51x | 11.68x | 10.27x |
| Return on Equity (%) | 82% | 17% | 18% | 20% | 24% |
| Return on Capital Employed(%) | 115% | 38% | 24% | 26% | 27% |
| Capital Structure | RS IN CR |
| Share Price as of 29/06/24 | 2,502.30 |
| Number of Shares O/S | 234.8 |
| Market Capitalization | 5,87,415.80 |
| Less: Cash & Cash Equivalents | -4,022.00 |
| Add: Total Debt | 1,484.00 |
| Add: Minority Interest | 205 |
| Enterprise Value | 5,85,082.80 |
To know more about the Business model of HUL: Hindustan Unilever Limited (HUL) Stock Analysis
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