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Last Updated : Jun 28, 2019 04:05 PM IST | Source: Moneycontrol.com

HUL shareholders' wealth doubled in 3 years. Are the best days behind it?

The FMCG giant has multiple moats such as rapidly improving adaptability to market requirements, recognition and strong execution, strong premiumisation and extensive use of technology

Suyash Maheshwari @Suyashm9
 
 
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Shareholders of Hindustan Unilever enjoyed substantial growth in their investment as the share price of the company more than doubled in the past three years.

The scrip rose 106.4 percent from Rs 859.80 on June 27, 2016, to Rs 1774.75, on the same day of 2019. In comparison, the BSE Sensex rose 50 percent during the same period while the Nifty50 soared 46 percent.

Let's put the surge in HUL's share price in perspective. Your investment of Rs 10,000 in the company three years ago would be now worth Rs 20,640.

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Analysts at Motilal Oswal expect the stock to rally further to reach Rs 2,070 on multiple moats such as rapidly improving adaptability to market requirements, recognition and strong execution on Naturals and other evolving categories, continuous strong premiumisation trend and extensive use of technology, creating further entry barriers.

The company witnessed a growth spurt in FY19 as domestic volume growth improved to 10 percent, from 6 percent in FY18. According to analysts, HUL stuck to its strategy of growing the core, evolving the portfolio through innovation as well as market development, and developing new channels.

Meanwhile, the operating margin (OPM) of the company inched up to 23 percent, which is in line with the global group strategy of sustained improvement in profitability.

"Revenue continues to outgrow volumes, suggesting a combination of price growth, superior product mix and premiumisation," said Edelweiss in a report.

"FY19 was operationally one of the strongest financial years for HUL, with revenue growing by 12 percent and profit after tax (PAT) rising by 17.3 percent YoY," said analysts at BNP Paribas.

BNP Paribas expects the acquisition of GSK Consumer to boost growth prospects of the company’s food business and added that better monsoons along with re-defined government policies will improve the agricultural economy and help demand getting back on track in H2 FY20.

Edelweiss, in its report, said the 51 percent rise in FY19's contingent consideration, which depends on Indulekha’s revenue, suggests an impressive performance by the brand.

"This instils confidence that HUL will be able to leverage the benefits from its other acquisitions, viz Adityaa Milk and GSK Consumer Healthcare," said Edelweiss.

According to Edelweiss, the acquisition of Adityaa Milk will enable HUL to pilot low-cost business models and enhance its ice creams supply chain and ‘go to market’ capabilities. Meanwhile, the acquisition of GSK Consumer India will help the company in building a sustainable and profitable foods and refreshment business in India by leveraging the mega trend of health and wellness.

HUL is also planning to launch an all natural line of products across multiple categories such as oral care, haircare, skin care, skin cleansing among others, which shows the company's willingness to adhere to market expectations of healthier alternatives.

With disruptive events such as demonetisation and implementation of GST behind them, Edelweiss expects the earnings growth to continue despite macroeconomic headwinds, particularly rural distress that has affected consumer sentiment.

"Rural, which has been logging 1.3–1.5x urban growth in recent times, slowed to 1.1x in Q4 FY19. Hence, the first quarter of FY20 might be particularly tough, with rural India still dealing with the slowdown. That said, volume growth thereafter should perk up," said Edelweiss.

HUL also boasts of one of the strongest working capital management frameworks as the net working capital cycle stayed negative at 119 days, aided by strong supply chain management and better relationships with traders and distributors, said BNP Paribas.

"Return ratios continue to improve and remained robust. RoE (return on equity) and RoCE (return on capital employed) stood at 84 percent and 113 percent, respectively, in FY19 as against 104 percent and 78 percent, respectively, in FY18. A strong improvement in return ratios was mainly led by a steady rise in operating margin (OPM), which expanded by 200 bps to 22.6 percent in FY19," said the brokerage.

Furthermore, cash generated from operations increased by Rs 1,660 crore to Rs 8,413 crore in the past two years.

"Strong cash generation ability helped HUL continue paying robust dividends (this stood at 90 percent in FY2019). Dividend per share stood at Rs 22 in FY19 as against Rs 17 in FY17," added BNP Paribas.

The stock of Hindustan Unilever last closed at Rs 1,774.95 on June 27.

Analysts' take

Motilal Oswal: Buy | TP: Rs 2,070 | Upside: 17 percent

Edelweiss: Buy | TP: Rs 2,039 | Upside: 15 percent

BNP Paribas: Buy | TP: Rs 1,990 | Upside: 12 percent

Kotak Institutional Equities: Reduce | TP: Rs 1,575 | Upside: -11 percent

Axis Direct: Buy | TP: Rs 1,875 | Upside: 6 percent

JM Financial: Hold | TP: Rs 1,825 | Upside: 3 percent

Institutional Equities: Buy | TP: Rs 2,000 | Upside: 3 percent

 
First Published on Jun 28, 2019 02:24 pm
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