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Valuation Of Hindustan Unilever Limited (HUL) Rises To Record High

Pritish raj by Pritish raj
April 24, 2020
in Industries, News
3 min read
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HUL Brands Valuation- Next Big Brand

HUL Valuation- Next Big Brand

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  • Investors on Dalal Road, who are becoming increasingly risk-averse, have raised the valuation premium of Hindustan Unilever (HUL) to a record high.

Investors on Dalal Road, who are becoming increasingly risk-averse, have raised the valuation premium of Hindustan Unilever (HUL) to a record high. The price-to-earnings (P / E) multiple of the FMCG business is now nearly twice that of its peers in the industry — the highest in 17 years. HUL is now priced at almost 77x its trailing 12-month net profit at its current market capitalization of Rs 5.18 trillion, against the industry’s average P / E of 43x. Its price advantage over the market is approximately 6x its historical average of about 570 bps at about 3,300 base points (bps). A one-hundredth of a percent base point

The measurement of the Industry Norm is based on the end of the financial year and the existing P / E multiples by sales of the top 20 consumer goods producers. In addition to HUL, there are ITC, Nestlé, Asian Paints, Godrej Consumer Goods, Marico, Dabur India, Colgate-Palmolive, P&G Hygiene, Britannia Industries, Pidilite Industries, Tata Food, Berger Paints, Emami, and Gillette India among others.

Analysts attribute the prime value of HUL to its relatively faster post-demonetization earnings growth and superior capital performance. “Since demonetization, operating and net profits at HUL have risen in double digits. This has made it one of the top options for investors looking at a pie of Indian market tale, “says Systematix Group head Dhananjay Sinha. For example, net sales of HUL have increased at a compound annual growth rate (CAGR) of 5.7 percent over the last three years, in line with the overall net sales growth of the industry (also 5.7 percent).

In addition, it is leading the industry in terms of operating income. Operating income of HUL has risen at a CAGR of 13.8 percent in the last three years, growing from Rs 6,934 crore during FY17 to Rs 10,231 crore during the 12-month period ended December 2019. The overall operating income of the industry increased at a CAGR of 8.8 percent over the same period. Others attribute is the market share of HUL to the rich valuation.

“HUL had been praised for its leadership in the FMCG room before the lockdown. After the virus outbreak, investors see it as a business that will continue to expand given the lockdown due to its leadership role in key categories such as soaps and products for cleaning and hygiene, “says G Chokkalingam, founder & MD Equinomics Research & Advisory Services.
He expects the stock to underperform the broader market until the wider economy returns to normalcy, thus enhancing sales and earnings growth from pro-cyclical sectors such as banks, NBFCs, as well as metals and mining firms. HUL’s valuation has also been backed by its industry-leading financial ratio. For example, HUL has one of the best equity returns (RoE) in its peer group at 86 percent and among the top listed companies in the country. In contrast, the average RoE for the industry was just 30 percent in the 12 months ending December 2019.
HUL’s return on assets at 65 percent is also nearly two and a half times that of the industry’s 25 percent average. That makes it capital-efficient for the company. “HUL has one of the best capital efficiencies among large companies, making it a major defensive play in times of uncertainty,” says Sinha. High capital efficiency means that very little additional capital is needed by the company to finance its growth which translates into high free cash flows and large dividend payouts. For example, HUL accounted for just 7 percent of the industry’s assets, but for the 12 months ending December 2019, 17.4 percent of net profits did. Lower assets mean lower liabilities, which translates into lower risks during periods of economic downturn, making it a favorite of risk-averse investors.
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Pritish raj

Pritish raj

Pritish Raj is a content writer at Next Big Brand. Hailing from the diversified state of Bihar, he is an engineer by education who chooses the way of poetry, photography, and writing to kick off his career. Highly enthusiastic about brands and startups, he aims to be a travel content creator.

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