The Hindu Business Line : Hindustan Lever: Buy

An investment can be considered in the stock of Hindustan Lever (HLL). The sharp surge in agricultural growth in the latest GDP numbers suggests that the spurt in rural spending is here to stay. HLL, with its expansive rural network, will be best placed to capitalise on the trend.

The stock now trades at 39 times its trailing four-quarters' per share earnings. These valuations are in line with the likes of Dabur India and Nestle. If the valuations appear high even after the recent correction, it is because the FMCG sector is on a growth trajectory backed by an increase in consumer spending, both rural and urban. Higher disposable incomes have also ensured the return of pricing power to industry players. In the backdrop of rising input costs, market leaders such as HLL now have the leeway to hike prices without sacrificing their market share.

HLL only recently raised prices of some of its key laundry bars, detergent powders and toilet soaps. This is a big segment, contributing about 45 per cent of its revenues, and the price hikes will have a positive impact on margins. Volume growth in this category is also likely to remain robust, on the back of higher rural incomes.

With its product line straddling across market segments, HLL is likely to improve its thrust on the high-growth foods business. Brands such as Kissan, Knorr and Annapurna contribute about 25 per cent of its revenues. HLL hopes to expand this business by taking advantage of its parent Unilever's products, which include olive oil, margarine and mayonnaise among others that are likely to find favour with the nation's elite. Focus on this segment is likely to improve as HLL continues to exit non-core businesses. It just concluded the sale of its flavour and fragrances business, Quest International to ICI India.

Buy with a two-year perspective. Investors can accumulate the stock in small lots and on price declines linked to broad-market weakness.

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