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HUL vs Sensex: PE widens big time
Dec 6, 2014


If two companies have similar growth rates, which is the other important factor that will decide what multiples these two companies should trade at? It is indeed the efficiency with which the companies use their capital. Or in simpler parlance, their respective ROICs. Now assume one of the companies to be the Sensex and the other one the FMCG behemoth Hindustan Unilever Ltd (HUL). It certainly goes without saying that by virtue of its great capital efficiency, Hindustan Unilever should certainly command premium valuations than the Sensex. But how much more? And this is what we are trying to answer in our today's chart of the day.

As the chart highlights, the gap between HUL's P/E and the Sensex PE has been the highest it has been in recent years. So does this mean HUL's future growth rates to be much better than what it has managed in the recent past? At least this is what the market seems to be implying. And taking a call on this is what it will eventually come down to, we believe. If the stock disappoints in terms of growth over the next few quarters, do expect the gap to reduce. If it doesn't, then the gap should persist we reckon.

Data Source: ACE Equity

This Chart Of The Day was published in The 5 Minute WrapUp - Is it the right time to exit good businesses?

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