The Hindu Business Line : Hindustan Unilever standing tall in the storm

The Nifty sports a decline of over 58 per cent so far in 2008 and a few index stocks have even tumbled by 80 per cent or more. But there’s one stock that has actually delivered a gain of 9.5 per cent in 2008 and a handsome return of 16.5 per cent over the past one year. That’s FMCG behemoth Hindustan Unilever (HUL). By staying in the green, the stock has outperformed the index by a whopping 67 per cent!

What’s made investors hold on to and even accumulate HUL, as they queued up to exit so many others? The perception that FMCG purchases would be the last to be impacted by the slowdown is one reason. Though the domestic slowdown — with the spectre of job losses and pay cuts — is now expected to cut into the consumer wallet, it is expected to impact big ticket purchases such as vehicles and durable goods, much ahead of FMCGs.

Strong cash flows and negligible debt also add to the attractions of FMCG companies amid the ongoing credit crunch and worries about rising interest costs denting profits.

In contrast to most other sectors, profit margins for FMCG companies are actually expected to expand over the next few quarters as input prices (palm oil, packaging) have corrected sharply, while selling prices across products have already been hiked over the past couple of quarters.

Why on ‘buy’ list

But the arguments trotted out above could apply to all FMCG stocks. Why has HUL alone managed positive returns? A high exposure to rural markets (where demand remains robust and unaffected by pay cuts et al), a portfolio spanning diverse products and price points (even a ‘downtrading’ consumer may have to buy an HUL product) and growth rates that better smaller peers are the key investment arguments in favour of buying the stock.

That the stock is the only one (apart from ITC) in the FMCG space to offer reasonable liquidity in terms of trading volumes, has also made it an institutional investor favourite in recent months. That’s ensured that HUL has been on the “buy” list of almost every mutual fund manager looking for a “defensive” option for his portfolio. Over 90 mutual fund schemes featured HUL in their portfolio in end October.