Is it time to sell HUL and buy SAIL? - The 5 Minute WrapUp by Equitymaster
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Is it time to sell HUL and buy SAIL?

Aug 5, 2015

In this issue:
» Gold may not have lost its sheen yet
» Are real estate developers changing strategy?
»  ....and more!

I have been researching stocks for over a decade now. And along the way, have learned some very important investing lessons. However, if given a challenge to pick the one lesson I think is the most important, I wouldn't mind going out on a limb to proclaim that buying cheap pays off in the long run. In other words, valuation does have the potential to cover a lot of sins.

Indeed. The one overriding theme across most of our successful recommendations over the years has been the fact that we never liked paying too much for a stock. This is irrespective of the speculation around its rosy future.

And the opposite is also true. A stock where people have speculated that it has a very gloomy future and is priced at beaten down valuations has nearly always found favour with us. This is provided we are convinced that its long term fundamentals are intact.

Needless to say this hasn't always worked flawlessly. We've had cases where our strict insistence on valuations has hurt our subscribers. It has caused them to miss out on a potential multi bagger. And there have been cases where a stock we thought was low enough to be bought has gone on to go even lower and never recovered. But over a large number of trades, buying cheap has really worked.

We believe value investing maestro Howard Marks has put this point across in a much better way than we have. This is what he has written in one of his widely read memos:

You can invest in the best companies in America and have a bad experience, or you can invest in the worst companies in America and have a good experience.

Interesting, isn't it? And this is what he has to say further.

All other things being equal, the price of an asset is the principal determinant of its riskiness.

Well, we believe it's the same thing as saying valuations matter a lot.

Ok, now how about taking this thought to its logical conclusion.

What we mean is as Marks has suggested, how about taking a view that one should sell the best company in India right now and buy what is considered as one of the worst investments currently.

We believe that the FMCG giant Hindustan Unilever (HUL) and PSU steel behemoth SAIL can serve as excellent role models for each of these types of companies.

Why? Simply because not only is HUL arguably one of the best companies in India but is also priced at high valuations if you ask us. And on the other hand, no one wants to touch commodity stocks with even a ten foot pole and this has made sector stocks, SAIL included, priced so low that it appears they are headed for bankruptcy.

Well, guess what, not just Marks but even history is on our side.

Over the last fifteen years or so, whenever HUL has traded at the valuations at which it is right now, investors have generated average returns of negative 4.6%, give or take a few basis points, over the next three years. What is more, even if the stock becomes cheaper by another 10%-12%, average returns over three years have been close to 4% per year, still nowhere close to being satisfactory.

SAIL, on the other hand has never traded this low in many years. And over the last fifteen years, buying the stock in and around its current valuations has resulted into an average three year CAGR of a whopping 130%! In other words, a twelve bagger in flat three years.

Of course, if predictions were all about imagining the future as an exact replica of the past, the librarians would have been the richest investors. But that's certainly not the case. The environment for both the stocks is vastly different from what it was in the past. We live in different world with different sets of opportunities and challenges. And therefore to that extent, the past price performance of both these stocks is no guarantee of future results.

However, what is also true is that things usually revert to the mean. That which has gone too high has to come down and that which is too low has to go up. And if one believes in this as well as in the fact that buying cheap really works, then it's certainly advantage SAIL over HUL.

However, if its business quality over everything else, then we believe HUL has definite edge. Unfortunately, we will have to wait for few years to find out which one comes out on top.

What do you think? Do you think commodity stocks like SAIL will outperform expensive stocks like HUL over the next 3-5 years? Let us know your comments or share your views in the Equitymaster Club.

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 Chart of the day
Gold prices have been falling since 2011 and recently hit a five-year low. Factors such as a strong dollar fuelled by expectations of rate hike by the Federal Reserve coupled with resolution of the Greek crisis and the nuclear deal with Iran have quelled uncertainty fears for now. Therefore the utility of gold as a reserve currency has declined. Moreover, even China has not been adding on to its gold reserves in its pursuit to make yuan a reserve currency. All these together have led to a slide in the global demand for gold.

Gold remains the safe haven asset
Data Source: World Gold Council & RBI

Therefore gold as an asset is losing its sheen, it may seem. But nothing can be far from truth. This is evident from the fact that developed economies still rely on gold as a safe haven. Therefore the central banks in these economies hold large proportions of gold. So much so that more than 50% of their forex reserves are contributed by gold. The relentless money printing and low interest rates unleashed by these economies to shake away recession remains firmly rooted on strong reliance on the yellow metal. In comparison, emerging economies such as China, India and Russia hold relatively smaller proportion of forex reserves in gold.

Another asset, real estate, has been in doldrums on account of the economic recession. This has severely dented the financial health of real estate developers. This is mirrored in a report by industry lobby FICCI and Knight Frank India that has stated that the sentiment in the real estate industry turned negative for the first time since the Lok Sabha elections in 2014. Therefore to ward of the slowdown, builders are increasingly focusing on the affordable housing segment. Even the present government has envisaged building six crore homes under the scheme of housing for all by 2022. Out of this, four crore homes are meant to be developed in rural India and the balance in urban India. The Union Budget 2015-16 has allocated Rs 140 bn for this programme.

As per a report by Cushman & Weikfield, real estate developers launched 7,000 units of affordable homes in the country's top eight cities for the June 2015 quarter. This a steep 320% jump from 1,670 affordable units launched in the year-ago quarter. Such steps are the need of the hour given that the real estate developers are saddled with huge stocks of unsold inventory that has led to severe liquidity crunch for them. Apart from this, even the Centre and states need to explore public private partnership to develop public housing.

The Indian stock markets opened the day on a firm note and continued to remain buoyant. At the time of writing, the BSE-Sensex was trading higher by 197 points (up 0.7%). Barring banking, all sectoral indices are trading on a strong note.

  Today's investing mantra
"Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."- Warren Buffett.

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst) and Madhu Gupta (Research Analyst).

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11 Responses to "Is it time to sell HUL and buy SAIL?"


Jan 13, 2017

Well HUL & SAIL are two different sectors thus inappropriate to compare. However with changing scenario and recent development in China, SAIL having more potential to give better returns. Secondly, what is the good price to enter into SAIL while considering negative EPS and big debt?


amarish shah

Aug 14, 2015




Aug 10, 2015

I think analysis of Veerappan sums up best. SAIL can be a good buy @Rs.40 or below and will give good returns after 3 years.
I have been requesting EM to give list of good stocks which was given a miss purely due to higher pricing but they are yet to oblige. I hope for better luck this time.
No question of swapping HUL with SAIL (unless you have a mind of steel)


sohan jain

Aug 7, 2015

BOTH HUL N SAIL are not comparable. First is international free giant n other is giant chained by govt. In HUL one can relax n get huge returns automatically & SAIL has huge capital n subject to volatility.I myself long back purchased 5000 sailshares at 45 & sold all at 245 in November OR December 2007 but I will not buy sail again least of all swapping HUL with SAIL.HUL returns are good not what u mentioned as I am holding HUL.Actually one must be cautious buying huge capital Elephants that too govt. elephants.



Aug 5, 2015

SAIL will reach single digit within next 12 months.It has invested about Rs.80000Crores in capacity expansion,However most of the product mix is in semis and not finished goods.Which will not fetch good returns in the market.It has jsu completeed employees pay revision and another due in 2017-18.Which will increase labour cost above 20%.No other steel maker has such huge fixed cost.The domestic steel demand is yet to pick up.Even if it pickes up SAIL is unlikely to benefit due to its poor product mix and huge cost of operation,high interest outgo and depreciation.Unlike Tata Steel and JSW,JSPL who have completed capacity expansion and ready to benefit when demand comes SAIL is yet to complete modenisation in all units.China also carries huge inventory which it will dump.To top it all SAIL also carries two unproductive units at Salem and Bhadravati.Therefore I think SAIL is in for bad times in next 2-3 yrs.



Aug 5, 2015

The comparison between Sail and HUL is the most inappropriate, You cannot compare a horse with a mule.



Aug 5, 2015

On 05 Aug 2011 HUL was 317 at NSE. Today it is 909. That is 2.86 times rise in value in 4 years. Add the value of dividend received to get a higher return.

I do not understand how you have calculated the 'low' returns on this scrip.

The suggestion to replace HUL with SAIL appears unreasonable looking at the stability and past track record of two companies and the quality of their managements. You have acknowledged that. FMCG with its steady earnings cannot be replaced by a commodity like steel.


Govind Ved

Aug 5, 2015

May be . The SAIL is a commodity stock, and all commodities are at low prices. We can say that it is worth not looking at HUL at such high prices, but so far as SAIL is concerned it is to be observed taking into Steel prices and performance qtr by qtr. and take the BUY decision.
To conclude, may by SAIL at lower levels.


Ganapathy Sastri

Aug 5, 2015

Growth at 130% in three years will translate to a FOUR bagger and NOT a 12 bagger. Having said, that, it will take a mind of steel to buy SAIL in today's world.


Shrinivas Moghe

Aug 5, 2015

According to me, the only major commonality between HUL and SAIL, is that both are giants in their own way. The major difference between them is that they play in different sectors. And considering the present political inclination, the sector in which SAIL is, has a much better prospects, as against HUL. Value addition in case of shares of SAIL will be better in the coming years, than of HUL's.

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