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Hindustan Lever – A wealth creator - Views on News from Equitymaster
 
 
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  • May 10, 2000

    Hindustan Lever – A wealth creator

    Hindustan Lever Limited (HLL) finds a place in most portfolios – retail and institutional. The reasons for this are not far to seek. The company is a leading wealth creator and its performance over the last 10 years is, to say the least, breathtaking.

    HLL is a part of Unilever, a $46 bn Fortune 500 company. Unilever is a world leader in foods, home & personal care products. In the domestic market HLL with 115 brands enjoys a leadership in soaps, detergents, color cosmetics, ice cream and packed tea segments.

    Unmatched track record
    HLL is one of the best-managed companies in India. It has the track record of creating shareholders wealth year after year by maintaining higher profit and dividend growth. Consider this example. A person who had invested Rs 10,000 in HLL’s shares in 1990 would have seen his investment grow at a compounded annual growth rate (CAGR) of 48% in the last ten years. In other words his investment of Rs 10,000 would have increased by 32 times at current market price. Assuming HLL will continue to maintain its growth rate in future an investment of Rs 100,000 in HLL’s shares at the current market price will appreciate to more than Rs 1 m after ten years on a CAGR of 25%. The CAGR of 25% takes into account the increasing competition and the higher saturation levels in the market. But nevertheless it is only an estimate of what the company would look like if it were to replicate its past performance.

    Enviable EVA
    HLL has consistently maintained growth in its operating profits year after year. It has generated operating profits in excess of the cost of capital employed by the shareholders. HLL's Economic Value Added as a percentage of capital employed is the highest as compared to any other company across all industries. The company should be able to maintain its EVA in future due to its strong brand equity and its ability to invest in projects where the returns are higher than the cost of capital.

    Comparative table showing the EVA performance
    Particulars HLL Infosys NIIT Punjab Tractors
    EVA (Rs bn) 6.9 1.3 0.7 0.6
    EVA as a % of Capital Employed 33.5 18.3 18.7 20.2

    Valuations At the current market price of Rs 2,460, HLL is available at a P/E of 51 times its FY99 earnings. Among the FMCG companies HLL enjoys the highest valuations due to quality of its profits, reputed management, leadership in various segments and an unparalleled shareholders wealth creation record.

    Comparative Valuations of Select FMCG Companies
    Particulars HLL P&G Cadbury Nestle Colgate Britannia
    Market Price (Rs) 2,460.0 655.0 836.5 322.7 141.0 598.0
    Market Cap/Sales (x) 5.3 2.9 3.9 2.0 1.7 1.4
    P/E (x) 50.5 20.8 48.3 31.6 40.6 33.9

     

     

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