Unveiling Shareholder Value Creation: A Deep Dive into Hindustan Unilever Limited

Unveiling Shareholder Value Creation: A Deep Dive into Hindustan Unilever Limited

In today’s competitive market, companies are assessed on their ability to create long-term shareholder value. Hindustan Unilever Limited (HUL) has consistently demonstrated value creation for its shareholders, backed by both financial metrics and qualitative factors such as effective management and strategic innovation. This blog explores HUL's performance by estimating and analyzing key value-based metrics (VBM) over the past two years, using data from Bloomberg's EQS function and additional sources.

Background and Overview of HUL:

Hindustan Unilever Ltd. (HUL) is one of India’s most renowned companies in the fast-moving consumer goods (FMCG) sector. With a vast range of products across personal care, home care, and food and beverages, HUL has built an impressive brand portfolio that includes household names like Dove, Surf Excel, and Lipton. Known for its commitment to quality and innovation, HUL has consistently delivered value to both consumers and shareholders.

Why is Hindustan Unilever Limited (HUL) the Ideal for Analyzing Shareholder Value Creation?

In the dynamic and competitive world of fast-moving consumer goods (FMCG), a few companies have consistently excelled in delivering value to their shareholders, and Hindustan Unilever Limited (HUL) stands out as a clear leader. HUL, a subsidiary of the global giant Unilever, has a long history of generating consistent returns and establishing a strong brand presence in India. But what makes HUL an exceptional choice for this analysis on shareholder value creation? Let’s delve into the quantitative and qualitative factors that underline HUL's excellence. 

 

Reasons for choosing HUL:

1. Strong Financial Performance & Consistent Returns: HUL's Return on Equity (ROE) exceeds 80%, significantly higher than the industry average, with a consistent dividend payout ratio above 80%, demonstrating effective capital utilization and shareholder returns.
2. Market Leadership & Strong Brand Portfolio: HUL holds a dominant market share (50%+ in categories like personal care and home care), with strong brands like Dove, Surf Excel, and Lipton, driving revenue growth and premium pricing.
3. Strategic Agility & Strong Management: HUL's management focuses on sustainability and efficiency, reducing plastic waste and improving water usage, while maintaining strong profitability through operational efficiency (25% operating margin).
4. Positive FMCG Industry Outlook: The FMCG sector in India is growing at a 10-12% CAGR, with HUL poised to benefit from increased disposable incomes, urbanization, and rural market penetration, alongside a strong digital transformation (e-commerce growth).
5. Alignment with VBM Criteria: HUL’s strong financial indicators (80%+ ROE, low debt-to-equity ratio of 0.1, and 22% EBITDA margins) and focus on sustainability align well with VBM criteria, enhancing its appeal to investors prioritizing long-term value creation.

HUL Value Octagon Framework:

1.   Business Innovation: HUL continuously innovates by adapting to consumer trends, launching eco-friendly and health-oriented products. Its digital transformation and 25% annual growth in e-commerce sales demonstrate innovation in customer engagement.
2. Capital Structure: HUL maintains a conservative capital structure with a low debt-to-equity ratio (0.1), ensuring financial stability, flexibility for investments, and high profitability with efficient capital utilization.
3. Risk Management: HUL employs a robust risk management strategy with hedging for foreign exchange and commodity price fluctuations, a resilient supply chain, and proactive sustainability initiatives to mitigate environmental and reputational risks.
4.   Performance Management: HUL focuses on operational efficiency with strong operating margins (25% in FY2023), performance-linked incentives, and regular reviews to align workforce performance with strategic goals.
5.   Corporate Governance: HUL has a transparent and accountable corporate governance framework, with a diverse board and strong ESG practices, ensuring trust and compliance with regulatory standards.
6. Mergers and Acquisitions (M&A): HUL strategically uses M&A to enhance its portfolio, such as acquiring GSK’s health food drinks business (Horlicks), aligning acquisitions with long-term growth goals and expanding market presence.

VBM Metrics

Value-Based Management (VBM) metrics focus on creating long-term value for shareholders by linking a company’s financial performance to its overall strategy

Residual Income

Residual Income (RI) is a key value-based metric that helps assess whether a company generates profits over and above the minimum required return on its equity capital. 

Residual Income=Net Profit−(Cost of Equity×Equity)

Year	Net Profit (₹)	Cost of Equity (%)	Equity (₹)	Residual Income (₹)
2023	101,200	9.68	505,220	52,286.62
2024	102,770	9.03	514,230	56,336.06

HUL’s residual income has shown an upward trend, increasing from ₹52,286.62 in 2023 to ₹56,336.06 in 2024. This positive change suggests that the company is not just meeting the required return on equity but is generating additional value for shareholders. The increase in residual income can be attributed to both higher net profit and a slight decrease in the cost of equity.

The drop in the cost of equity from 9.68% in 2023 to 9.03% in 2024 indicates a reduction in the perceived risk of investing in HUL, possibly due to its stable financial performance, market leadership, and low debt levels. A lower cost of equity makes it easier for the company to generate residual income, thereby increasing the profitability generated over and above the capital cost.

In essence, the increasing residual income for HUL signals effective management and capital utilization, demonstrating the company’s capacity to create long-term shareholder value.

Economic Value Added (EVA)

Economic Value Added (EVA) is another crucial metric used to evaluate a company's true economic profit. Unlike traditional profit metrics like net income, EVA takes into account the opportunity cost of capital, helping determine whether a company is generating a return that exceeds the cost of both equity and debt capital. 

EVA=NOPAT−(WACC×Capital Employed)

Year	NOPAT (₹)	WACC (%)	Capital Employed (₹)	EVA (₹)
2023	101,739	9.67	583,410	45,299.10
2024	100,723	9.02	596,110	46,946.83

HUL's EVA has also shown a positive upward trend, rising from ₹45,299.10 in 2023 to ₹46,946.83 in 2024. This increase in EVA signifies that the company has been able to generate returns in excess of the cost of capital, which is a clear indicator of value creation.

The slight decrease in WACC from 9.67% in 2023 to 9.02% in 2024 mirrors the improvement in HUL's cost of equity, reflecting a more favorable cost of capital environment. This reduction in WACC contributes to a higher EVA, as the company is able to generate more profit over the cost of capital.

Furthermore, despite a small decline in NOPAT in 2024 (from ₹101,739 in 2023 to ₹100,723), the lower WACC and larger capital base have enabled HUL to maintain a strong EVA. This shows that even in the face of slightly lower operating profits, HUL has managed its capital more efficiently and continues to generate value for its shareholders. 

Future Growth Value (FGV)

It represents the portion of the company's total value that is attributed to expected future growth beyond its current operations. FGV helps investors and analysts assess the impact of a company's growth opportunities on its overall valuation.

Future Growth Value=Market Value−Current Value of Operations

	2023	2024
Future Growth Value	5,543,881,918,375.09	5,510,408,601,691.4

Future Growth Value (FGV) represents the portion of a company's market value attributed to its expected future growth opportunities, beyond the value of its current operations. For HUL, the FGV for 2023 is approximately ₹5,543,881,918,375.09, and for 2024, it is approximately ₹5,510,408,601,691.48. The slight decline in FGV from 2023 to 2024 suggests a modest reduction in the market's expectations for HUL's future growth prospects. This could be due to various factors, including market sentiment, competitive pressures, or changes in the macroeconomic environment.

Total Shareholder Return (TSR) 

TSR represents the total return to shareholders, including both capital gains (stock price appreciation) and dividends. It is a comprehensive metric for evaluating shareholder value.

Total Shareholders Return =Market Price of Current Value - Market Price of Previous Year + Dividend/Market Price of Previous Year 

	2024
Total Shareholders Return	-29.44117016

For 2024, HUL's TSR is approximately -1.18%, indicating a slight negative return. This decline is primarily due to a decrease in the market price from ₹2491.55 to ₹2462.1, despite the dividend payout of ₹22. This negative TSR suggests that the market price decline outweighed the positive impact of the dividend, reflecting potential investor concerns or broader market conditions affecting HUL's stock performance.

Current Value of Operations (CVO)

The Current Value of Operations (CVO) is a metric that reflects the value of a company’s ongoing business activities. Unlike traditional metrics that offer a snapshot of financial health, CVO provides a more dynamic perspective by incorporating the company’s capacity to generate economic value consistently over time.

CVO=Capital Employed+EVA/WACC

	2024	2023
Current Value of Operations	1,051,661	1,116,513

The Current Value of Operations (CVO) for HUL has decreased from ₹1,116,513 million in 2023 to ₹1,051,661 million in 2024, reflecting a decline of approximately 6%. This reduction suggests a decrease in the value of HUL’s ongoing business activities, despite positive financial metrics like EVA and residual income. The decline in CVO could indicate that while HUL remains profitable, its ability to generate consistent economic value has slightly diminished, potentially due to factors such as lower returns on capital employed or reduced growth prospects. The drop highlights the need to monitor operational efficiency and capital utilization closely.

 Traditional Metrics of Hindustan Unilever Limited

Return on Assets	13.60%
PB Ratio	11.3
EPS	43.74
debt/assets	1.90%
Current Ratio	1.7
operating margin	22.10%
Return on Equity	20.20%
PE Ratio	56.3

• ROA measures how efficiently a company uses its assets to generate profit. A ROA of 13.60% indicates that HUL is highly efficient in utilizing its assets to generate earnings. This strong ROA reflects the company's effective asset management and operational efficiency, suggesting robust profitability relative to its asset base.

• The PB ratio compares a company's market value to its book value. A PB ratio of 11.3 means that HUL’s market value is 11.3 times its book value, indicating that investors have high expectations for the company's future growth and profitability. This high ratio often reflects the company's strong brand equity, market leadership, and perceived growth potential.

• EPS represents the portion of a company’s profit allocated to each outstanding share of common stock. An EPS of ₹43.74 suggests that HUL is generating substantial profit per share, which is a positive indicator for current and potential shareholders. High EPS is often associated with strong profitability and efficient management.

• The debt-to-assets ratio measures the percentage of a company's assets that are financed by debt. A ratio of 1.90% indicates that HUL has a very low level of debt relative to its assets, reflecting a conservative capital structure and lower financial risk. This low ratio enhances the company’s financial stability and provides flexibility for future investments.

• The current ratio measures a company’s ability to pay short-term obligations with its short-term assets. A current ratio of 1.7 indicates that HUL has 1.7 times more current assets than current liabilities, signifying good short-term financial health and liquidity. This ratio ensures that the company can comfortably cover its short-term debts and operational expenses.

• Operating margin measures the percentage of revenue that remains after covering operating expenses. An operating margin of 22.10% indicates that HUL retains ₹22.10 of every ₹100 in revenue as operating profit. This high operating margin demonstrates the company’s strong control over costs and efficient operations, contributing to overall profitability.

• ROE measures the return generated on shareholders' equity. An ROE of 20.20% signifies that HUL generates a profit of ₹20.20 for every ₹100 of equity. This robust ROE reflects the company’s effective management in generating high returns on shareholders’ investments, indicating strong profitability and efficient use of equity capital.

• The PE ratio compares a company’s current share price to its earnings per share. A PE ratio of 56.3 suggests that investors are willing to pay ₹56.30 for every ₹1 of earnings, indicating high expectations for future earnings growth. While a high PE ratio can be a sign of overvaluation, it often reflects strong investor confidence in the company’s growth prospects and financial performance.

Comparative Analysis: Traditional vs. Value-Based Metrics

Profitability and Efficiency

• Traditional Metrics:ROA (13.60%) and operating margin (22.10%) indicate strong profitability and operational efficiency.
• VBM:EVA and residual income highlight profitability above capital costs. Positive EVA and increasing residual income confirm HUL’s ability to create economic value over and above capital expenses.

 Shareholder Value Creation

• Traditional Metrics:High ROE (20.20%) and EPS (₹43.74) reflect substantial returns to shareholders.
• VBM:Residual income provides a clearer measure of shareholder value, with its increase signaling HUL’s success in exceeding required returns and creating value beyond equity costs.

 Market Perception and Valuation

• Traditional Metrics:High PB (11.3) and PE (56.3) ratios reflect strong market valuation and investor confidence.
• VBM:
• CVO aligns with market valuation, confirming HUL's operational effectiveness, though its decrease in 2024 highlights potential challenges.
• FGV shows that a significant portion of HUL’s value is tied to future growth expectations, underscoring strong growth prospects despite short-term fluctuations.

 Financial Health and Stability

• Traditional Metrics:Low debt-to-assets ratio (1.90%) and solid current ratio (1.7) indicate financial prudence and stability.
• VBM:EVA and residual income also reflect financial stability, as they show that HUL generates returns exceeding capital costs, ensuring long-term value creation.

Total Shareholder Return (TSR)

• Traditional Metrics:Not directly reflected in traditional metrics.
• VBM:TSR of -1.18% in 2024 indicates a negative return due to a decrease in market price, showing that, despite strong financials, market perceptions and external factors impacted shareholder returns.

Conclusion

Hindustan Unilever Limited (HUL) exemplifies excellence in shareholder value creation, evidenced by both traditional and value-based metrics. Traditional metrics such as Return on Assets (ROA), Return on Equity (ROE), and Earnings Per Share (EPS) highlight HUL's robust profitability, operational efficiency, and substantial shareholder returns. Value-based metrics, including Economic Value Added (EVA), residual income, and Current Value of Operations (CVO), provide a deeper insight into the company’s ability to generate economic profit and sustain long-term growth, confirming that HUL consistently exceeds its capital costs and adds significant economic value. Despite facing market fluctuations, HUL's strategic agility, strong brand portfolio, and prudent financial management ensure its continued market leadership and financial health. This comprehensive performance makes HUL a masterclass in delivering long-term value to its shareholders and maintaining a strong market position in the competitive FMCG sector.