HUL Fundamental Analysis: Popular household brand

How does a company become a brand? How does a product become so popular that it starts shaping our daily lives and not just becomes a popular name, but a necessity that shapes our everyday life? The answer lies in three very important aspects of business, a marketable product, strong and targeted marketing, and wide distribution network. One such company that has pioneered all the three aspects of consumer goods segment is HUL(Hindustan Unilever Limited).

HUL was incorporated as Hindustan Vanaspati Manufacturing Company in 1931, which manufactured vanaspati (hydrogenated oil) under the brand name “Dalda”. The product was longest running brand in India.

In 1956, Hindustan Vanaspati manufacturing company became “Hindustan Lever Limited” as a result of a merger among Lever Brothers, Hindustan Vanaspati Mfg. Co. Ltd. and United Traders Ltd. Company was renamed as Hindustan Unilever Limited in June 2007.

Business:

HUL is a market leader in consumer products segment with products in more than 20 categories. Company started manufacturing soaps, and the moved to other consumer categories such as, food, tea, detergents, shampoo, personal care products, and water purification. According to survey, two out of three consumer products sold in India are HUL brands. Some of the well known brands in various categories are as follows:

Soaps: Lux, Liril, Lifebuoy, Pond’s, Pears, Rexona, Dove, Breeze

Haircare: Sunsilk, Dove, Clinic plus, Tresemme

Handwash and Bodywash: Lux, Dove, Lifebuoy, Axe (Soaps, Bodywash and Deodorants), Pond’s

Cosmetics: Vaseline, Lakme, Fair and lovely, Denim (Shaving products)

Food: Annapurna Atta, Brooke Bond Tea (Red Label, yellow label, green label, Taj Mahal, Taaza, Lipton), Kissan (Ketchup, Jam and Squashes), Bru coffee, Knorr soup, Kwality Wall’s frozen Dessert, Magnum Ice cream.

Home Care: Vim (Dishwash bar), Rin, Surf (detergent), Wheel, Cif, Domex (floor cleaner and disinfectant), comfort (fabric conditioner)

Oral Care: Closeup, Pepsodent

Other than these products, company has also launched a  range of ayurvedic products under brand name Lever Ayush which has, skin care soaps, haircare and toothpaste products. Company also sells water purifier under brand name Pureit.

Company Revenue:

Company’s major revenue comes from soaps and detergents segment. 49% of the company’s total revenue comes from this product segment. Personal care and cosmetics segment is the second biggest contributor for to the topline of the company. 29% of company’s revenue comes from this segment. Third biggest contributor is the beverages segment which includes tea, coffee, sauce and jams.12% of company’s revenue is contributed by beverages segment. Chart below will give you a clear breakup of segment wise revenue:

HUL is a market leader in FMCG segment, with a strong and efficient distribution network and smooth supply chain that has helped HUL to reach the rural market of India where consumption of such products is growing at a faster rate than in urban India. This has helped company capture a larger market share and consumer base, leading to better financial results. Some of the financial highlights of HUL are as follows:

Basic EPS:

Basic EPS is a measure of how much profit a company is making on per share basis. In other words, it’s a measure of how much money each share of the company will receive if all the profits earned during the year is distributed to its shareholders.

Company’s Basic EPS has seen a growth of 9% CAGR. While in 2012 HUL’s EPS was Rs. 12.26 per share in 2016, Basic EPS of HUL was Rs. 18.87 per share. HUL has a market cap of 2.5 lakh crores. When a company becomes so big, there is a little room for it to grow further unless a new business opportunity is visible which can be profitable in the future. HUL, being run by smart management has chalked out some good diversification and expansion plans to compete with rivals in organic and ayurvedic category of products (detailed discussion in our future expansion plans segment)

Cash EPS:

Cash EPS is a measure that looks at how much cash flow the company has generated during the financial year. Cash EPS shows how much cash the business is generating in a year. Cash EPS not only includes Cash received by the business for the products sold or services provided, it also includes any upfront payments, such as cash advance received by the business.

HUL’s Cash EPS grew at almost 11% CAGR, which is higher than its basic EPS which grew at 9% CAGR, this means company is able to generate more cash as it receives lot of cash in advance before delivering its products to its customers. Talking about Cash EPS for the last 5 years, in 2012 HUL’s Cash EPS was Rs. 13.46 per share and in 2016 it was Rs. 22.62 per share.

Revenue From Operation/Share:

Revenue from operations is a measure of how much revenue a company is generating from its core business. Revenue from operations does not include income from non operating activities such as sales of assets, sale of subsidiaries, income from investments made etc. Revenue from operations/share measures how much revenue a company is generating from its core business on per share basis.

HUL’s revenue from operations/Share has seen a growth of 7.6% CAGR. While in 2012 company’s Revenue from Operation/Share was Rs. 102.32 per share, in 2016, it was Rs. 147.67 per share.

Net Profit Margins:

Net Profit margin is the key ratio which is used to compare profitability of two or more companies working in the same sector. Net profit margin is a measure of how much percentage of total sales remains with the company as profit after all the expenses are paid.

Company’s Net Profit Margins have been healthy and stable for the past 5 years. In 2012 Net Profit Margin of HUL was 12.16%, while in 2016 it was 14.07%. In the past 5 years, company NPM has been in the range from 12% to 14.5% (approx.)

ROCE:

ROCE or Return on Capital Employed, is a measure of how efficiently the capital of a company is being used to generate profit. ROCE is expressed in percentage terms. A company with ROCE of 20% means out of every 100 rupees employed as capital, company is able to make a return of rupees 20. HUL has a very high ROCE because of its efficient inventory management and high volumes of sales.Continuous efforts towards targeted marketing, brand building, efficient supply chain and wide distribution network is working in company’s favour. Huge demand for HUL’s products leads to faster movement of company’s inventory, generating cash for HUL which it can reinvest on  a regular basis, which enables it to grow its market base.

Debt/Equity:

Debt to equity ratio tells us how much of the total financing of the company comes from creditors (those who lend money at an interest) and investors (those who invest in the shares of a company). Higher debt to equity ratios is an indication that majority of company is financed by loans and other debt (such as debentures and bonds)

Company has no debt on its books.

Dividend Payout Ratio (%NP):

The dividend payout ratio measures the percentage of net income that is distributed to shareholders in the form of dividends during the year. In other words, this ratio shows the portion of profits the company decides to keep to fund operations and the portion of profits that is given to its shareholders.

HUL has always been a generous dividend paying company. Company distributes major part of its profits as dividends to its shareholders. Company pays around 60% to even 95% of its net profits as dividends to its shareholders. In 2012, Company paid 60.22% of its net profit as dividend to its shareholders, while in 2016, this number went up to 79.53%.

Dividend/Share:

Dividend per share is the amount of dividends a shareholder receives on per share basis. Dividend per share includes all the interim dividends paid during the financial year as well as the final dividend paid at the end of the financial year. Dividend per share is calculated by dividing total dividends paid during the year from total number of shares outstanding.

HUL’s dividend payment on a per share basis has seen a good growth in the past 5 years. In 2012, HUL paid Dividend of Rs.7.5 per share, which in 2016, went up to Rs. 17 per share.

Future Expansion plans:

The reason why HUL has been successful in creating so many popular brands lies in its strategy to reach out to its potential customers by targeted marketing and increasing its brand recognition. Company’s continuous innovations in various categories is another factor that has contributed to its success.

Entrance of new players in the sector with product differentiation is seen as threat to the leadership of HUL. In order to protect its market share, company is planning to launch a new category of products such as Lever Ayush, which is a portfolio of ayurvedic products such as soaps, skin care products, shampoos etc.

Company is also launching a new range of cosmetic products under the brand name Citra which is an organic skin care brand from Indonesia. HUL has also rolled out a naturals variant under brands like Tresemme and Fair and Lovely.

Company is focusing on expanding its business in rural India. HUL’s 33% revenue comes from the rural markets, and is growing twice as fast as the urban markets. Company expects this to be a good source of sales and revenue.      

What makes HUL a good investment:

• Company is a market leader in FMCG segment
• Has a huge portfolio of consumer products spread over 20 categories
• Strong brand recognition, some of the brands are synonymous to the product itself (Surf, one of the brands of the company is synonymously used as detergent)
• Strong distribution network, and rural penetration, coupled with strong and efficient supply chain.
• High ROCE, shows efficient use of capital by the management.
• Excellent dividend history, company distributes major part (70% to 90%) of its net profit as dividends
• Company launching new range of ayurvedic products under brand Lever Ayush, to compete product differentiators like Patanjali, ayurvedic consumer product manufacturer
• Launch of another range of organic skin care products targeting urban consumers under brand Citra.