13 November 2012

Hindustan Unilever Ltd (HUL): A good business is not always a good stock

HUL is an example of a great business. It has a portfolio of famous FMCG brands that every Indian uses atleast once a day. Who wouldn’t recognize Lux, Lifebouy, Kissan, Rin, Surf, Axe, Close Up, Dove, Fair & Lovely, Sunsilk or other HUL brands? With Indian growth driven primarily by domestic consumption, there is no question whether HUL, with all its powerful brands, is well positioned to take advantage of this growth or not. Even respected stock research houses are claiming that ‘HUL is on a path of sustainable growth with the help of its powerful & diversified brands and thus they maintain a Buy rating on the Stock once again.’

HUL Hindustan Unilever Limted
HUL - A good buy?

But we beg to differ from everyone here. We are not convinced that HUL is a good BUY at this price. With HUL at Rs 530, there are some facts which suggest that it may not be the best time to buy this stock:
  • HUL is commanding a P/E multiple of 50. This is highest multiple it has ever commanded. FMCG companies generally trade at high PE multiples. But a PE=50, doesn’t seem sustainable.
  • With a 3 year growth rate of 4.63% in Sales & 2.02% in Profits, a P/E of 50 does seem irrational.
  • If we check HUL’s PEG Ratio with Current PE=50 & G=15% (though past records stands at less than 5%), we get a PEG=3.33. And a stock having PEG>1 is considered to be overvalued.
  • Another way of looking at PE=50 is that investors expect HUL to grow at 50% per year in future. And common sense says that this is insane. With a company of HUL’s size, a 50% growth rate is like Elephant running at 300kmph!! :-)

So what are your views?

Disclosures: No Positions in HUL. But if we had already purchased HUL years ago and had big capital gains built into the stock, we wouldn’t sell it even if it was overvalued. This is because we believe in power of doing nothing in stock markets. :-)

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9 comments:

  1. http://equity.philip9876.com13 November 2012 08:28

    I hung on to that stock for almost 2 years and it just never went beyond 200. After i sold it off 2 yrs ago, it has gone to 500+? Sigh....

    ReplyDelete
  2. @ae7a067f6150aae4cf74497821ddaa95:disqus

    Oh!! Lets hope that investors like us get an opportunity to enter HUL at more saner PE levels. After all, its a good business, which right now is not available at reasonable prices.

    ReplyDelete
  3. Hello.
    I hv very recently came across this site... and instinctively liked the presentations. There is a lot that I agree (eg HUL at 530 -- no buy).

    However, I would like to differ with the authors on capital appreciation part....
    I would like to initiate a discussion on this topic but don't know if that is welcome... and if it is, then how & where (not net savvy one bit)

    ReplyDelete
  4. VKRMA

    Discussions are always welcomed :-)
    Since we do not have any forum on our site at present, you can check our Facebook page ( http://goo.gl/z1C9x ) and start a discussion thread there.
    Please let us know if you face any problems by mailing us at stableinvestor@gmail.com

    ReplyDelete
  5. Hul is down 21% since hitting its lifetime high. Is it the APPLE Of India??
    Will it fall more? What is a good price to buy for next 2 years?

    ReplyDelete
  6. Vishal Khandelwal23 January 2013 12:40

    Just loved you parting comment - "...we believe in power of doing nothing in stock markets." I'm living that thought because I've done nothing with my holding in HUL :-)

    ReplyDelete
  7. @9765aef5543c6fce73d39c407a46082a:disqus

    HUL & Apple? We don't think it would be right to compare apples with oranges ;)
    As far as further fall in prices is concerned, we don't know how much will it fall. Or will it fall any further at all or not. But we still feel that one can wait more if one is considering HUL for 'fresh' long term investments.

    ReplyDelete
  8. @ad85b0f4fd6e7642b33188aeddc4f8b0:disqus

    Indeed HUL is a great stock to hold for long term. And if one is ready to hold it for next 10+ years, it is an amazing stock to have considering India's consumption led growth story.

    ReplyDelete
  9. HUL is good company. If one plans to hold it for more than 5 to 8 years then one should not worry too much about present valuations

    ReplyDelete

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