HUL, Unilever: Different strokes

Hindustan Unilever (HUL), the maker of Lux, current market capitalisation of Rs 5.08 lakh crore is almost half of its overseas parent Unilever.

The FMCG company is riding the change in earnings prospect and business outlook post Coronavirus outbreak.
On the other hand, it’s overseas parent Unilever, has been forced to change its operations as the lockdowns and travel restrictions, imposed post pandemic, seen impacting consumer demand patterns.
Unilever Plc withdrew its full-year forecast on Thursday, saying the hit from lockdowns in China and India, as well as lower ice cream sales, offset strong U.S. and European sales
In Europe, Turkey and Latin America, Unilever’s 3 billion euro ($3.2 billion) ice cream business was hit by national efforts to prevent the spread of the coronavirus, deterring distributors in holiday destinations from buying stock.

The British-Dutch transnational consumer goods company co-headquartered in London, England, and Rotterdam, Netherlands, has withdrawn its outlook for the year after reporting sales were flat in the first quarter, despite an increase in demand for hygiene and in-home food products.
Underlying sales growth was flat with 0.2% from volume and negative 0.2% from price. Turnover increased 0.2% to €12.4 billion.

Developed markets grew 2.8% while emerging markets fell 1.8%. China declined as a result of the significant downturn in food service, out of home ice cream and retail sales during the lockdown in January.

Outside China, most of Unilever’s major markets saw normal sales patterns in January and February, before making a real impact in March. The Chinese market slowed significantly during the lock-down period, while Europe and North America stocked household goods across March.

Unilever has withdrawn its guidance for the year but will pay its interim dividend of €0.4104 per share.
Meanwhile, HUL is riding to glory on the investor quest for safe haven demand. In fact, the risk averse investors have pushed HUL’s valuation premium to a record high. The key price-to-earnings (P/E) multiple is now nearly twice that of its industry peers — the highest in 17 years.
At its current market capitalisation, HUL is now valued at nearly 77x its trailing 12-month net profit, against the industry’s average P/E of 43x.

HUL’s premium valuation is attributable to its relatively faster earnings growth in the post-demonetisation period, and its superior capital efficiency.

HUL’s valuation has also been supported by its industry-leading financial ratio.
For example, at 86%, HUL has one of the best return on equity (RoE) in its peer group, and among the country’s top listed firms. In comparison, the industry’s average RoE was just 30% during the 12 months ending December 2019.
At 65%, HUL’s return on assets is also nearly two and half times that of industry average of 25%.
This makes the company capital-efficient. HUL has one of the best capital efficiencies among large firms, which makes it a great defensive play in uncertain times. High capital efficiency means the company requires very little incremental capital to fund its growth that translates into high free cash flows and large dividend payouts.
HUL accounted for only 7% of the industry’s assets, but 17.4% of net profits during the 12 months ending December 2019.

Lower assets mean lower liabilities, which translates into lower risks during periods of economic downturn, making it a favourite of risk-averse investors.

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