HUL Share Slump: Should You Invest Now?

Hindustan Unilever Limited (HUL)

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?

HUL share price decline

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.

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

Leave a Reply

Your email address will not be published. Required fields are marked *

− 1 = 1
Powered by MathCaptcha

Popular posts

Legal Disclaimer | Privacy Policy | Terms & Conditions | Investor Charter

About Us | Contact | Blog

Facebook Instagram Youtube X-twitter

SEBI Registered Investment Advisor INA100004608

Sana Securities is a SEBI Registered Financial Advisor with SEBI Registration no. INA100004608. Investments in the securities market are subject to market risks and investors should read all the related documents carefully before investing. Terms and conditions of the website are applicable. Privacy policy of the website is applicable.