Life-time high: Why HUL is a darling for investors

At a time when the market is trading near its two-year low, it takes a stock with a very strong fundamentals to touch a life time high. Hindustan Unilever Ltd (HUL) is one such gem.

The company has touched an all-time high of Rs 411.80 and continues to be on the buy list of most broking houses. The biggest fast moving consumer goods company is being viewed as a defensive stock at a time when almost all sectors are collapsing. Catering to the necessities of life such as soap, toothpaste and oils, the company has been unaffected by a slowdown which has taken down most of the other industries including pharmaceuticals.

In a year marked by high inflation and skyrocketing commodity prices, ‘price hike’ was the name of the game for the Indian fast-moving consumer goods (FMCG) sector, even as they consolidated businesses acquired in the past. Unlike the previous year, mergers and acquisitions took a backseat and cost-efficiency was a focus area to sustain strong volume growth this year.Companies took greater interest in penetrating into rural areas and boosting the consumer sentiment, while ‘premiumisation’ was a key strategy employed during the year to tap the growing middle-class segment.

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[caption id=“attachment_162962” align=“alignleft” width=“460” caption=“Despite the price hikes, experts say the sector was able to sustain a volume growth of 9-10 percent, thanks to the focus on affordable and small pack sizes.”]  [/caption]

Despite the price hikes, experts say the sector was able to sustain a volume growth of 9-10 percent, thanks to the focus on affordable and small pack sizes. In addition, HUL is also thinking of widening its premium products portfolio to tap the high-end of the segment.

What is also working in HUL’s favour is that the company is increasing prices of its products more than the rise in its raw material prices. HUL is among the few companies in the market which has shown an increase in its sales as well as improvement in its margins, despite rising raw material prices and falling rupee, which impacts its imported raw material.

On a valuation basis, however, the company trades at 34 times its current year profit expectation and 29 times its financial year 2013. While the valuation does look high, given the growth scenario, uncertainty and lack of similar growth opportunities in the market, HUL continues to attract investors.

According to a report by industry body FICCI, the Indian FMCG market is expected to grow at rate of 10 percent over the next 10 years and reach a size of Rs 4,13,000 crore by 2015 and Rs 6,65,000 crore by 2020.Currently, it is estimated to be worth about Rs 2,60,000 crore , contributing 4.8 percent to the GDP.