I’ve seen a few premium products like St.Iveys at a relative’s house but the label says Unilever. Does HUL gain anything from sale of such premium products on which the label says Unilever. If not, what is the arrangement bewteen Unilever and HUL on this matter.
Thanks
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The value investors have been telling this since 2017 and not for decades. They are right. Since then for 6 years, CAGR has been 6%. HUL need to continue to underperform for atleast 2 years in this price so as to reach 40 PE which is the right entry point to makes 12% CAGR in the next decade or stock need to correct another 20% for a value investor to buy in this year.
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I know people who used to dabble in stocks when most of these value investors were kids…and most of them also never bought HUL then…why? because it was super expensive even then…
Not saying that it will repeat what it has done as we dont know how much growth is possible ahead in business but just wanted to convey that quality is expensive is not new.
It is not being launched by HUL. Some agencies are importing and selling in India o Amazon. Nothing to do with HUL.
Quality stock’s valuation is expensive but they can be expensive only to a certain extent compared to market valuation. There is lot of difference between 80 PE and 30 PE for a 12% EPS CAGR like HUL whereas nifty is always around 22 PE with 10% EPS CAGR.
HUL was not super expensive before 2017.It was trading at 40 P/E on an average most of the time between 2012-2017.
The same HUL was trading at 30PE for a decade between 2002-2011 but no so-called matured growth investor came forward to buy as they were busy speculating on infra and telecom stocks. Hence no demand for HUL stock and never went up to even 40PE for a decade.
The percentage of value investors is much lesser compared to growth+momentum+speculative investors in market and hence value investor’s demand for a stock does not impact price as others are supplying more.
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Thanks for the details & your perspective. Last I had checked, current PE is around 50 for HUL. I maybe wrong.
Again, I have some doubts although cannot say for sure, but HUL was around 50 since a long time.
Regarding NIFTY PE vs HUL PE…I think in addition to EPS CAGR, what matters is the longevity & relative surety with less relative risks & variables for achieving that EPS CAGR.
I am not justifying the high PE nor have any opinion about it…just trying to see that if a relatively risky infra/defence/cement/power etc. can trade at “x” valuation, what can an FMCG trade at.
Of course with digital era there have been disruptions in terms of D2C, retail private labels & ecommerce…this is according me a defining decade in progress for what will be about to come…whether the delta to X would sustain or not…how rural, rurban & urban would behave and which FMCG firms are able to work their way around it & how soon & how efficiently…
All earnings are not same. Needs to be seen in context of cash flow,return ratios and longevity.
At end of the day any business needs to valued only on basis of all cash flows till eternity.
Most of the valuation of a company is dependent on terminal value. Something like L&T EPC would start seeing a lot of degrowth a decade down the line vs HUL. India’s population is likely to remain around current population till end of century thus providing long runway for FMCG companies.
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If one believe EPS growth of HUL has better longevity than that of Nifty, one can always have different perception.
In spite of 1% CAGR population growth of India in past 10 years, HUL EPS growth is 11%. Then how can one expect it to be better in the next 1 or 2 decades ?
FMCG cannot have a growth beyond a point as one dont brush or take bath thrice a day due to personal income growth but pay more for technology or luxury which is part of Nifty.
I mean it stayed at 75-80 PE for 2 years between 2019-21 and still LIC was buying it. Thats the thought process of all fund houses- Buy quality at any price.
I haven’t been through the concalls in quite sometime.
Can anyone share volume/value/overall growth guidance from management? Any capex they are undertaking? Premiumization plans?
Disclosure: Invested since 2020. Considered it a safe bet with low expectations 8-10% to stabilize portfolio against severe downturns. Terrible growth numbers this year are giving me the jitters, looks like this ‘safe bet’ also needs an active watch. Hope it returns to same old 8-10% soon 
Mentioning Notes from Screener:
Operating Context and Financial Performance:
- Softening in prices of key commodities passed on to consumers.
- Nominal to no price growth due to high cumulative inflation and weak monsoon affecting rural demand.
- Urban, organized trade, and premium portfolio led growth for FMCG overall.
- Resilient performance with underlying sales growth of 3% and underlying volume growth of 2%.
- EBITDA margin up 40 bps year-on-year.
- Net profit crossed 10,000 crores in fiscal year.
- Market shares improved by almost 200 bps compared to 2021.
- Small and regional players resurgence affecting market shares marginally.
- Expectation of MAT business winning metric to come back towards the second half of calendar year 2024.
- Underlying volume growth of 2% in Q4.
- EBITDA margin at 23.4%.
- Profit after tax before exceptional items and profit after tax declined by 3% and 6%, respectively.
- Home Care grew 1%, Beauty and Personal Care declined by 2%, Foods and Refreshment had positive pricing and delivered mid-single-digit USG.
- Margins remained healthy in all three segments.
Key Thrust Areas and Business Strategy:
- Focus on growing the core through unmissable brand superiority.
- 19 brands with turnover over INR 1,000 crores each.
- Embarked on a journey of making brands unmissably superior.
- Market making and premiumization focus through persuasive communications, innovating in new demand spaces, and educating consumers.
- Strong portfolio leading growth, contributing to more than 25% of business.
- Transformation in Beauty segment focusing on contemporizing master brands, investing in high-growth demand spaces, and embedding core capabilities.
- Leveraging capabilities to outperform in the Beauty segment.
- Continuous focus on premiumization, innovation, and market penetration.
- Expecting improvements in rural consumption with better monsoon and macro-economic indicators.
- Optimistic outlook for the future with a focus on driving competitive growth and maintaining margins.
Segment Performance:
- Laundry Segment: Powders continue to grow in volume, liquids growing ahead due to faster conversion, bars returning back to growth, focus on premiumization.
- Health Food Drinks (HFD): High single-digit growth driven by pricing and volume growth, Nutrition Plus range accelerating growth, efforts to build consumption yielding results.
- Beauty Segment: Mid-single digit growth, premium portfolio growing in double digits, pioneers in liquids category, focus on premiumization and innovation.
- Soaps Business: Sharp decline in performance, actions taken to address low unit price value equation, premium brands performing well.
- Personal Care Segment: Decline in mass end of the portfolio, premium portfolio showing stronger growth, continued focus on building penetration and consumption in key categories.
- Horlicks and Health Food Drinks: Significant efforts in building penetration and consumption for Horlicks, focus on building premium portfolio and driving growth in the adult space.
Market Share and Channel Strategy:
- Gaining market share in the Beauty and Personal Care segment.
- Recovering market share in categories like mass skin cleansing and detergent bars.
- Focusing on building penetration and consumption in key categories.
- Channel split: under 70% in general trade, under 20% in modern trade, around 6-7% in e-commerce.
- E-commerce growing fastest, followed by modern trade and general trade.
- Quick commerce segment gaining traction within e-commerce.
- Focusing on high margin portfolio in quick commerce, beauty commerce, and marketplace.
Outlook and Future Plans:
- Expecting gradual improvement in FMCG demand.
- Forecast of above-normal monsoons and improving macro-economic indicators.
- Price growth expected to be low single-digit decline in near term.
- Focus on driving competitive volume-led growth across business.
- Actions underway to address performance in the skin cleansing segment.
- No immediate plans for price increase due to deflation in commodity basket.
- Planning for low single digit price increase in the second half of the financial year.
- Targeting 23-24% EBITDA margin band, with focus on maintaining current levels in the short term and modest margin improvement in the medium to long term.
- Unilever planning to separate the ice cream business by second half of 2025, further decisions and strategies to be communicated in the future.
5 Year and 10 Year Median P/E is 64 ad 61. Long Term Median P/E is 47.
Valuations are at 10 Year Low P/E of about 53 at the moment.
5 Year Sales and PAT Growth is 10% and 11%, and Stock Price CAGR is 6%. Slow growth will continue for some time. Price CAGR will depend of P/E re-rating.
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HUL and Asian Paints both giants in their category maybe at lowest valuations in a decade, but does it alone make a strong case for mean reversion??
In this age of digital marketing where new comers with limited budget can also become big in less time, do large FMCGs like HUL with low growth even deserve 50+ PE?
Comparing below the screener data for Honasa with HUL and Asian Paints with Indigo paints//
Agreed that some of these businesses might not make it big and profitable in the long run, but surely some of them will. and that should be enough to question what valuations should we really put to these large fmcg firms…
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Considerations :
- Free cash flow growth (11%) (The CAGR growth during the last 10 years)
- Discount rate 10.70% (As per latest Annual Report - FY 2024)
- Perpuitity Growth 2%
By considering the above, and by simple DCF analysis, the current stock price of Rs. 2785/-, is priced for the next 30 years.
Thoughts and rationale are welcome
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What do you mean by that? Do you say that there will not be any appreciation for the next 30 years with the current run rate? Can you elaborate pls?
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When I mentioned that the stock is “priced for the next 30 years,” I didn’t mean there wouldn’t be any appreciation over that period. Instead, I was referring to the expectations that the market has already built into the current price. In short, the market is expecting HUL to generate free cash flows over a significant time, which is reflected in the current stock price.
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Limited biased view, the way to look at HUL could be:
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A large venture fund, managing a portfolio of brands, that has a lot of cash and can buy out any emerging competition to any of its categories. It can compete and when it can’t it can take over
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An alternative to bonds with reasonable capital appreciation and growing dividends built in. From that reference point getting 10-12% with growing dividends could be appealing. Then the PE debate may not be that significant
Disc: Invested, biased.
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I am not at all here to debate the P/E ratio. My rationale is, the stock is priced for all the positive factors:
- Defensive Nature
- Long-Term Cash Flow Potential: Strong dividend payouts over the long term.
- Industry-Leading Operating Profit Margins (OPM): Consistently high margins and pricing power.
- The company is well-positioned to benefit from India’s growing consumer market.
- Strong Corporate Governance.
- Less Capital-Intensive Business Model
- Strong Distribution Network and Supply Chain, and understanding of market dynamics
- Efficient Cash Conversion Cycle
- Support from Parent in R&D
However, it’s essential to consider the following potential risks,
- Evolving Brand Dynamics: Brands are now engaged in two-way communication with consumers, increasing the pressure to maintain a positive brand image and customer loyalty.
- Rise of Private Labels: The growing popularity of private labels, especially in retail.
- Increasing Competition from D2C Brands - They may leverage digital platforms
- Potential Price war
If the company fails to meet these already priced-in expectations, there could be a rerating, impacting the margin of safety.
Every investor’s risk appetite and perspective will differ. For those seeking returns that outpace fixed deposits or bonds, HUL could be a suitable addition to their portfolio.
Disclosure: Invested, and looking for a stable payout.
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I am of the opinion that, businesses like Asian Paints, Nestle, HUL are relatively simple businesses to understand, and Market gives them high valuations for slow but consistent Sales Growth, High ROCE.
Market mostly ignores their slow EPS growth as it like consistent players.
Probably Mr. Market looks for the following:
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Have they faced tough competition in the past and Have they still survived and still growing ?
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How is the Management Quality of these businesses ? Are there any wrong doings in the past or do they have good quality managements ?
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Can they scale up further from here either organically or inorganically to maintain their slow and consistent Sales growth while maintaining ROCE above Cost of Capital ?
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Can you recollect their Brands ? Will people buy their brands at least for next 10 Years ?
That does not means that Mr. Market completely ignores their current slow EPS growth but Mr. Market gives much higher weightage to their consistency.
There will be periods of No Returns for these stocks and There will be periods of more than 15% CAGR returns in Stock Price. It depends on various factors and investor’s buy price.
If an investor finds better opportunities else where at higher risk, and they are willing to take higher risk, they will not buy any of these stocks. These stocks are suitable for only few investors which prefer slow and steady businesses in their portfolio.
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If there is a bull market, one that extends for longer periods, there will be many choices to choose from. As most stocks move up because of institutional buying, and in a bull market, particularly a bull market like present, where retail are eager to apply for IPOs, SME IPOs, there is no dearth of opportunities for institutions, and institutions being equipped with better analysis of business, along with the fact that they have to perform at least good, if not being first, so as to collect funds from retail via their offerings, some large cap stocks may get no traction.
Only, when there is froth, which can be felt or seen in one way or the other, things start to move the other way. Looks like, this has begun. A 10% appreciation with a 2% dividend yield again starts to look good. But even here, if there is loss of market share, which seems to happen with many companies, the price paid here can still be high, so despite there is no threat to existence for years, the best scenario would be to be at a very low price.
In a way, this makes sense. As time and capital are limited, chasing growth with some safety can be attempted. Be it institutions or individuals, everyone tries to maximize profit, find optimal use of capital.
Just some thoughts. Not invested now, had a position in the recent past.
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Anyone knows how much percentage is icecream business of hindustan unilever of total business?