Stock Review: HUL

Despite leading brokerages coming out with a sell recommendation on HUL and given weak broader markets, HUL's stock has gained 4% in the past seven trading sessions. This is because HUL remains one of the safest bets in the pure Indian FMCG play and provides higher confidence in its earnings growth when compared to its peers.

HUL's sales growth in the past few quarters has come mainly from volume growth and not from increase in product prices, unlike other companies. Its average volume growth in FY11 was 13% and net sales also grew by 13.5%. Also, despite the cost inflation, HUL did not compromise much on ad spend, when compared with Dabur, Marico, Nestle and Godrej Consumer Products in the previous quarter. This will give HUL enough room for price hikes and further cut in ad spend in the coming quarters to fight against the rise in input costs.

HUL remains one of the most diversified FMCG companies, followed by Dabur. It mainly operates in the soaps and detergent, personal care and food and beverage categories and faces competition from various multinationals as well as regional players in each of the categories. After years of strategising, HUL's market shares in each of these categories have stabilised and started to improve gradually. Dependence on soaps and detergent business, which remains the most competitive, is gradually decreasing. Personalcare segment, which has the highest margin, now contributes more than almost 60% to the earnings, compared with 45% a year ago. Its sales grew by 16% in FY11, without any compromise on margins. Also, the low margin at which the soap and detergent business is operating is not sustainable for the competition, or HUL. This limits further decrease in margins. All this puts HUL in a better position and provides confidence in future earnings growth than most of the other players in the FMCG sector. At the current market price, HUL trades at a P/E multiple of 30. This valuation sounds justified when compared with Dabur, Nestle or Godrej Consumer that are trading at 35x, 46x and 26x. HUL also remains a pure Indian FMCG player, compared with other companies that now have a good amount of exposure to foreign markets, which do not enjoy such high valuations.