Scripscan:Hindustan Unilever Ltd
cmp:270
Code:500696
Story:HUL is a terrific business by all means. Unlike the growth stories that we are greedily eyeing, this is almost an 'annuity' business and works with very high return ratios. It is rich in cash, hides intangible/ strategic assets (brand value is one, for sure) and spewed over 135% RoE over 2008. HUL's leadership across a number of FMCG categories is unquestioned, and so is its stake in the future of Indian FMCG consumption. You can't doubt the fact that it's a great business, but are we buying it anywhere near a sensible price? (I have similar feelings about NTPC, especially since its returns are capped, and we should not pay an unreasonable premium over book value for this otherwise great company.) Consider for a minute that HUL quotes for 27 times the earnings, and cannot grow in a sustained manner any faster than it is doing right now, which can be 12%. This, too, will now be aided largely by price falls in its raw material costs (in line with global crude/commodity prices) rather than volume growth in the key segment of detergents. Whether it will be forced to pass on the price drops to consumers in the next few quarters will be a key consideration. If it doesn't, the 27 times multiple will look attractive. Otherwise, the stock will face a sell-off (aided by the near-term outperformance overhang over 2008; HUL rose 20%, while the Sensex fell over 55%!). This is surely a great business and undoubtedly an asset to have for lifelong for your children and grandchildrens.
Thursday, November 5, 2009
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