Hindustan Unilever Ltd (HUL) has completely outperformed the market in the past 12-14 months what with fast moving consumer goods (FMCG) being perceived as a defensive sector and safe haven for investment in turbulent times.
The sector is considered so due to the strong inherent characteristics of the FMCG business that thrives on domestic consumption.
HUL, which enjoys the largest share of the Indian FMCG market, has grown very well backed by both urban and rural demand for its product basket.
Though the rural demand is expected to be strong going ahead, the risk of HUL’s overall sales volumes slowing down is significant in the current macro environment.
HUL’s volume growth has declined in the past few quarters and even though the company is already cutting prices / increasing grammage of its products, the risk that its volume growth may remain low persists.
Thus, we believe that though the long-term consumption growth story of India would benefit HUL the most, the current premium that its stock commands compared with the market comes with a near-term risk and makes the stock vulnerable to underperformance in the days ahead.
Outlook and valuation
The rising risk of the stock underperforming the market in the near term could provide trading opportunities. However, despite the technical head winds, we maintain a positive investment view on the stock.
Overall, the longer-term outlook for HUL remains positive on account of the strong demand push from rural India and the increasing salaries of the government employees that form a good chunk of the Indian consumers.
Moreover, there is also room for a substantial increase in the penetration and consumption levels of the key FMCG categories. At the current market price the HUL stock trades at 21.9x its FY2010E earnings per share (EPS) of Rs11.
We maintain our estimates and BUY call on the stock.