Outlier in Focus – Hindustan Unilever

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We come across a large number of interesting stocks in Capitalmind SNAP Outliers, our discovery tool for stocks with momentum. See a video of how Outliers works, and how to use Outliers to find all-time highs. Here’s a stock we found interesting that’s been an outlier. Catch them all here.


Sectors such as Pharma and FMCG are categorized as defensives in the sense that when the markets are on a move like we are witnessing at the moment, these sectors are generally among the under-performing ones while on the other hand, when markets are down, the fall in these sector’s isn’t as severe as the overall market.

Between Jan of 2006 to Jan of 2008, Nifty 50 went up by 116% while Nifty FMCG and Nifty Pharma Index climbed just 45%. On the other hand, between Jan of 2008 and Jan of 2009, while Nifty 50 saw a 50% fall, Nifty FMCG Index fell by 19% while Nifty Pharma Index fell by 26%.

Currently we are seeing a unique situation where Nifty FMCG Index is hitting new all time highs and Nifty Pharma Index is hitting new 52 week lows. Such has been the strength of FMCG index that Year to Date, its return exceeds that of the broad-based Nifty 50. Nifty Pharma Index on the other hand is currently down 10%.

Valuation wise, FMCG stocks have always traded at a premium to broad indices such as the Nifty 50. The median Price Earnings ratio of the 15 stocks that form part of the FMCG index is 50 with the biggest outlier being United Spirits which trades at humongous 99 times its earnings.

In the recent rally that we have observed in the markets, the big index mover has been stocks like Hindustan Unilever and ITC. ITC due to its 100% equity being free-float has a weight of 53% of the Nifty FMCG Index. Hindustan Unilver on the other hand has a weight of just 15% in the Index.

On the charts, while both stocks are hitting all-time highs, it’s Hindustan Unilever that appears more interesting and promising.

The stock has recently crossed above its previous all-time high established in 2015. The recent rise has come in the aftermath of the announcement of GST rates. GST for most Fast Moving Consumer Goods companies is expected to be neutral with a slight bearish tilt. With monsoon predicted to be good, there is a lower risk of bad results in the coming months.

Financials:

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Over the years, Hindustan Unilever has shown strong growth while at the same time being able to increase its operating margins.

Valuations too have been on a constant rise with it currently topping the 50 mark which brings us to the bigger question, with profit growth being more or less constant, would this mean range based trading for the forthcoming future?

How much scope would be for a re-rating of the stock given the already high valuations it attracts?