HUL is firmly on track on its digital transformation strategy, much ahead of its peers
Current slowdown in consumption could mean muted demand and this may weigh on volume growth
Analysts have come back feeling assured after attending Hindustan Unilever Ltd’s (HUL’s) annual investor meet on Friday. The management reiterated its Re-imagining HUL theme and strategy. Re-imagining HUL is the company’s digital transformation programme, which is broadly aimed at leveraging technology to evaluate and cater to consumer needs better.
“Overall, HUL’s strategy has remained consistent over the past 2-3 years. Execution of strategy keeps getting better and the company is firmly on track for digital transformation, much ahead of its competition," pointed out Kotak Institutional Equities.
Analysts from Jefferies India Pvt. Ltd wrote in a report on 7 June, “The key theme for 2019 Investor day (like 2018) was the emphasis on the role of data and digital as the third biggest strength for the company after brands and people."
HUL’s growth strategy includes focus on strengthening the core (around 40-45% of company’s business), create categories of the future and drive premiumization.
According to its presentation, the company has increased its Ebitda margin by 7.4 percentage points over the last 10 years to 23% in FY19. Ebitda is earnings before interest, tax, depreciation and amortization.
Over FY13-FY19, the hair care, colour cosmetics, laundry and tea segments have performed well. These categories have grown at a compound annual growth rate of 11%, 15%, 10% and 10%, respectively. Market share gains have been robust in the hair care and tea segments.
But as analysts at Kotak say, there’s a lot to like in HUL, except valuations. Indeed, at the current market price of ₹1,852.50, the stock trades at 56 times estimated earnings for FY20, based on Bloomberg data. These valuations suggest investors have great expectations from the future. While the company may end up performing well on revenue and margins, growth in margins can’t be expected to be spectacularly high off the current base. Indeed, HUL told analysts that margin expansion potential is lower vis-à-vis recent years.
Besides, the company isn’t immune from the vagaries of the economy. The recently concluded March quarter saw the economic slowdown rub off on its volume. HUL’s volume growth last quarter at 7% was the slowest in the past six quarters.
Of course, the ongoing consumption slowdown could well translate into muted demand for the company. Volume growth could be adversely impacted on account of muted rural demand and liquidity pressures in the trade channel.
True, investors will have to watch for the gains from the GSK Consumer Healthcare acquisition from a medium-term perspective. However, in the interim, given already stretched valuations and the uninspiring demand outlook, the case for meaningful upsides in HUL’s valuations is thin.