Hindustan Unilever’s share price hints at rising investor expectations

Hindustan Unilever’s share price hints at rising investor expectations

Most companies would be happy when their shares do well on the bourses. Hindustan Unilever Ltd (HUL), whose share price has been rising in recent months, too, should fall in that category. But this time, HUL may be wishing investors had waited a while before going long. The company is returning cash to shareholders through a buy-back scheme, to lower excess cash and improve its return on capital.

While the buy-back price is capped at 280, the market price reached a high of 314 last Friday, before closing at 309 on Monday. The company plans to buy back around 22.5 million shares for 630 crore. As of 14 September, the company had announced to the National Stock Exchange that it had bought back only around 400,000 shares.

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HUL’s price rise is being attributed to the general rise in stock indices, good monsoons and a return of pricing power in the competition-ridden home and personal care products market. HUL’s performance has indeed been improving in recent quarters, with volume growth improving in key categories such as soaps and detergents. In the June quarter, its volumes rose by 11%, partly due a low base effect which will go away in the September quarter.

Recently, consumer companies have been hiking prices selectively in products, especially where prices had been cut to improve volumes and where raw material prices have been rising. In soaps, for example, higher palm oil prices have forced them to hike prices. Food inflation continues to be high, continuing to put pressure on household budgets.

Companies have been hiking prices to offset inflation in inputs, and not to demonstrate pricing power. The last time companies hiked prices too fast, they watched consumers switch to cheaper products. HUL is unlikely to repeat that mistake. It would rather use its scale to manage procurement costs better, keep price rises to the minimum, and grab share from smaller firms, who will feel the pinch in an inflationary scenario.

Any shift in HUL’s strategy will become evident only in the next few quarters, and whether it continues to focus on growth or on margins, too. A lot depends on the parent company’s strategy.

On Monday, it announced the acquisition of Alberto Culver Co., a US-based personal care company, which sells hair styling and conditioning products. Unilever has said that it will extend these products to new emerging markets. India may well be one of them.

A bigger product portfolio allows HUL to grow in smaller but faster growing, and premium segments, of the personal care goods market in India. Its share price has risen by around 20% since its June quarter results were declared. It trades at a price-earnings multiple of over 30 times, based on its estimated fiscal 2011 earnings per share.

Bettering it would be a tough task, unless its results indicate a shift in strategy. That may perhaps explain why it fell by around 2% on Monday, despite the market rising by 0.4%.

Graphic by Yogesh Kumar/Mint

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