The curious case of HUL and how the markets play favourites

Hindustan Unilever just posted its results for the quarter ending March 2018. A healthy 14% year-on-year increase in net profit mostly attributable to a poor base quarter. HUL stock price promptly went up from around 1504 to 1574, a 4% increase in a couple of days. It is now valued at 65 times Earnings

This means, If HUL’s profits stay the same and it paid out all of it’s profits to shareholders, it would take 65 years for a shareholder to recover her current buy price. For context, the NIFTY is at 27 times earnings.

Chart shows HUL Earnings and Price growth over the last 10 years.

The Calm Investor | HUL EPS Growth

Note how HUL price growth has outpaced earnings growth in 7 of the last 10 years. Historically, even in years of negative earnings growth, the stock barely corrects.

HUL has always been that kid in class, sits on the front-bench, extremely polite to the teacher, books neatly covered, assignments always handed in before time. The teacher’s pet. And because of that, he can do no wrong. Even on the occasions when he does get an answer or two wrong, the teacher feels the question must have been ambiguously worded and so refuses to penalize the trust-worthy student. HUL is and always has been, the market’s pet.

The NIFTY or rather the current constituents of the NIFTY overall have seen share prices rise faster than earnings growth. Overall, share prices of the 50 stocks currently in the index have risen 23% annually compared to earnings growth rate of 13%.

The Calm Investor | NIFTY EPS Growth

Note the above EPS and Price calculation is equal-weighted and not market-cap weighted.

You’re probably thinking, well earnings are only part of the picture. ROCEs and Free Cash Flows matter more and you’re probably right but let’s face it, no other number gets as much press as earnings do.

Turns out HUL is not the only stock to get favourable treatment from market participants.

NIFTY Market Favourites

The Calm Investor | NIFTY Market Favourites

Tables shows stocks that have seen compounded annual price growth in excess of 10% over annualized EPS growth over the last 10 years.

The column Price % > EPS % shows the number of years out of the last 10 where price growth outpaced earnings growth. The top of the table is mostly companies that have seen recent sharp earnings decline pushing down annualized earnings growth rates like State Bank of India, Axis Bank, Lupin while companies like Tata Steel have been volatile with many down years and yet have managed to hold their share price.

NIFTY Backbenchers

You turn up every day, work harder than most of your peers, and deliver. But for some reason unknown to you, the teacher doesn’t give you as much credit as she does to Hindustan Unilever.

Table shows the rest of the current NIFTY that has shown faster earnings growth than HUL but seen slower price appreciation over the same time period i.e the backbenchers in the same class

The Calm Investor | NIFTY Earnings Growth 2018

Imagine being ITC that has shown a similar growth rate to HUL but has seen 35% slower price appreciation. Or worse, imagine being HPCL that has almost 50% higher earnings growth but has had nearly 20% lower annualized price appreciation to show for it. That too while marketing a price-regulated commodity. Similarly for Infosys, Hero Motorcorp and the others.

Each of the 17 companies might be right to feel unfairly treated by the market at being passed over for the sexier FMCG “brands and distribution moat” play. Note there is no company in the NIFTY that has grown earnings at a similar rate as HUL and has seen comparable price appreciation.

As much as markets claim to be objective about rewarding companies that deliver earnings growth and punishing those that don’t, borrowing from the abridged commandment in George Orwell’s Animal Farm

“All stocks are equal but some stocks are more equal than others”

I’ll now go back to wondering on what planet a stock with Price-Earnings of over 60 can be considered a “defensive” pick.


Appendix: The Earnings vs Price growth table for all stocks in the NIFTY

2 thoughts on “The curious case of HUL and how the markets play favourites

  • May 17, 2018 at 11:32 am
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    Maybe we should also look at the stock supply and demand? Around <70% in case of HUL is owned by promoter, rest would be in "strong" hands. I believe all the old investors would be holding on to their HULs and P&Gs etc irrespective of the quarterly results. Heck do they even track the quarterly results, On the other hand, ITC <55% promoter holding and then they give lot of ESOPs to employees who cash them regularly. So lot of new supply coming into the market. Plus some people don't want to buy sin companies..

    http://www.caporbit.com/nestle-india-a-long-term-stock-return-study/

    The above is a good article in this context. I too was "afraid" of high valuations when I invested into HUL around 1-2 years back, but it has already given 88% returns. But obviously valuations are high. It might do a time/price correction but there would be buyers at lower levels.

    disc – invested into both HUL, ITC

  • May 17, 2018 at 11:47 am
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    Thanks Bhaskar for sharing the Nestle post. My discomfort with HUL’s valuations are just that, my discomfort coming from a “buy cheap” mindset. I’ve learnt from experience that sticking to my process works better for me than to deviate without having the conviction to hold.

What do you think?