Hindustan Unilever

The Hindustan Unilever (HUL) stock has been the sole exception to the re-rating enjoyed by consumer companies over the past year.

The stock made no gains even as the BSE FMCG index soared by 41 per cent. This is a good opportunity for conservative investors to add this blue-chip to their portfolio.

Signs of better-than-market volume growth in HUL's recent numbers, strong pace of new launches and its ability to massively outspend rivals in defending market shares may help it accelerate sales growth in the year ahead.

Pessimism about HUL's sluggish sales and market share losses have also resulted in the stock's valuation slipping into a discount relative to its peers. At current market price (Rs 235), HUL trades at a one-year forward PE of 21, against Nestle India's 34 times and Dabur India's 27 times, offering room for re-rating.

HUL's financials for 2009-10 were not impressive, as its net profit remained flat while sales grew a tepid 6.3 per cent. However, this hides the big improvement in its growth trajectory in recent quarters.

The key concerns for HUL last year were its slow volume sales in categories such as soaps, laundry and tea, where rivals managed to gain market share through aggressive price cuts. Benign input costs also allowed regional brands to undercut HUL and capitalise on consumer down-trading.

However, HUL has managed to address most of these concerns over the past couple of quarters.

One, it has taken price corrections in segments such as laundry and advertised aggressively to fortify its presence across price points. The steady improvement in HUL's overall volume growth to a healthy 11 per cent for the March quarter (from 1 per cent in the September quarter), seems to indicate prevention of further market share losses.

Two, recent months also saw an exceptional pace of new product launches as it entered segments such as premium male grooming and rolled out new offerings in branded tea, skin care and ice creams.

Though this has required HUL to set aside a whopping 14.5 per cent of its sales towards adspend, it is likely to pay off through a better product mix.

The latest March quarter numbers in fact show that HUL managed to hold on to its gross margins despite taking deep price cuts in its laundry segment. Personal products, beverages and foods revved up to a 15-23 per cent sales growth and aided margins.

Finally, firming raw material prices and rising competitive pressure in FMCGs may also give HUL – with its massive scale – a sizeable edge over its rivals whether in procuring inputs, ramping up advertising budgets or garnering shelf space.

Over the medium term, HUL's strength in modern trade, plans to treble its rural reach and reduce distribution inefficiencies too could boost its size as well as competitive advantage.

via BL