The outperformers 2020

How HUL hopes to keep up its pace of growth, despite downtrading

No country or company can grow in a linear fashion, but HUL’s 4G growth model will stand it in good stead, says CEO Sanjiv Mehta 

It is among the most admired companies in India. Not only for constantly grooming leaders for India Inc, and for being an outstanding marketeer, but also for its sincere effort with social responsibility and environmental matters – something that is becoming an important part of any corporate legacy.

That’s not all. The story looks even better when you look at how the stock market has showered its adulation on Hindustan Unilever over the past decade. HUL’s stock price gained nearly 10x between March 31, 2010 and March 31, 2020, adding Rs.4.5 trillion to its market cap. Over the past five years alone, the stock price compounded at 21%, amid irrational exuberance in the sector. Trading at a price-earnings (P/E) multiple of 67x trailing earnings, the company will have to grow a minimum of 10% every year for the next 35 years and about 5% thereafter to justify the current valuation, according to research done by Abakkus Asset Manager founder Sunil Singhania, a year ago.

That seems like a tall order going by its past performance. The best period of business growth for HUL in this millennium was between FY05-FY15 when sales compounded at 11.67% and net profit at 13.79% as against nominal GDP growth of 15.86%. Thereafter, its growth has been more muted. Over the past five years, its sales grew a modest 4.47%, lagging real GDP growth of 6.61% and nominal GDP growth of 10.69% for the same period. Its earnings growth of 9.08%, while double the sales growth, was still lower than the nominal growth in GDP. 

Even though India continues to be a consumption-led economy, with 60% of GDP driven by consumption expenditure, HUL’s portfolio is increasingly not capturing a considerable share of consumer spending. While consumers tend to allocate a higher share of their wallet to durables and other indulgences such as travel and entertainment as per capita income rises, a trend that has been established over the past decade with rising household credit spurring penetration in several consumer segments, HUL has not adequately captured new segments in the staples space either, say analysts. 

HUL’s product portfolio covers a wide range of products in personal care straddling all price points and a narrow range of foods too, but that hasn’t proved enough to track India’s growth. To lift its sales growth curve, the company will have to add significant new high-growth categories to its portfolio. Although HUL has premiumised its portfolio over the years and added new categories that have better growth runway, its portfolio is still dominated by product categories that have attained high penetration and that poses a limitation to growth going forward, according to analysts. “The best case for HUL would be to match GDP growth,” says Singhania. 

A relatively easier way to fix the growth deficit will be to snatch market share from competitors or enter newer sub-segments through acquisitions, and then gun for disproportionately high bottomline growth by doing a great job of extracting synergies from these acquisitions, something the current management has been doing with high degree of success. Even then, the 10% growth that the market expects may be a tough ask. “Acquisitions will be the best route, but given their elephantine size, it will need a very aggressive strategy to better the past track record,” points out Singhania.