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Battling Back the Competition

A stock for all seasons

Hindustan Unilever (HUL), a Rs 6,009 crore company, is a stock for all seasons and bucking the bear market is one of its specialties.

India's largest FMCG company’s links with the country go as far back as 1888,  but it was established here officially some 75 years ago. Chances are that you may not have heard of the company, yet its brands are omnipresent: Brooke Bond, Lux, Kissan, Surf, and more — 700 million consumers use its products.

The stock over the decades has been backed by steady offtake as the rest of the companies and sectors in the economy battled the boom and doom periods as they came and went. Its resultant ability to generate topline and profit growth has kept it as a favourite with all those looking to safeguard their investments and post profits too.

The company is doing well enough during the current market rally too. Over the April-June quarter, its stock has risen by as much as 12.79 per cent, while that of Sensex has risen by 46.37 per cent. Not only has it been fighting market turbulence well in 2008, it has also been able to take advantage of the current situation, fighting off volatility to post perceptible gains.

The enhanced performances have been courtesy the company looking to take the battle to the mid-sized and small companies that had virtually uprooted it from the hinterland, causing the company's volumes and profits to dip. The effect has still not worn off as can be seen from the fact that its sales growth is muted in April-June quarter at 13 per cent QoQ and 6.6 per cent YoY.

However, since April 2008, the volume growth rate has been falling and jumped into the negative in the quarter ended March 2009 with the company reporting a de-growth of 4.2 per cent YoY.

But its profits after tax were up 10.3 per cent YoY (32% QoQ) over the June quarter. Its earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) indicates that the gain has been to the extent of 11.6 (YoY) per cent (17% QoQ). The company closed the fiscal ended March 2009 with 15.5 per cent growth in net sales, an operating profit margin of 14.5 per cent and a net profit growth of 15 per cent.

One of the big reasons helping the company stay at the top has been the 70 bps YoY fall in raw material cost that helped boost operating margins by 78 bps.

The challenges from large rivals have remained a constant, but where HUL is really losing out to is in rural markets to mid-size companies that have put in shade most of its products. However, aside from the ramped-up spend on advertising and distribution in rural areas, the company has an unrivalled brand power as well as a vast distribution network that will help keep it at the top.

At the current market price of Rs 260 the stock trades at 23.8x and 21.1x its FY2010E and FY2011E EPS of Rs 10.9 and 12.3 respectively.