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 Is HUL is really worth for Rs 600 to buy or sell….?

When HUL came out with its annual results last Monday, everyone on Dalal street were talking about how expensive is the stock price. Next day as soon as its parent company Unilever offered to purchase 22.5% stake in its own business for $5.4 billion (Rs 600 per share), suddenly this business started looking cheap.

An offer of Rs 600 per share was almost 22% at premium to its closing price on Monday. Unilever (parent company) came out and mentioned that they consider the fair value for their own business in India is Rs 600 per share.

It will be interesting to learn from James Allison next week about his rationale behind this offer of Rs 600. Any market price of HUL below Rs 600 will look like it is trading at discount. It is in human nature when you start believing that management can’t be wrong to evaluate its own business value, any price below Rs 600 is cheap.

It is at that juncture where you start believing in managements call, most of the investors make mistake. If I start digging in the past about all of these managers’ convictions and belief then let me tell you that I can see a massive corporate graveyard where management had put wrong foot while calculating its own or other businesses fair values. They have lost uncounted shareholders wealth either in buying at premium and selling at cheap!

So the question arises is how do you justify that Rs 600 is a fair deal for existing customer or should you accumulate more before it breaches Rs 600 and jumps  up to the new highs.

We need to look at every investment rationally. The very first thing as an investor we do and also ask other investors is to shut down the stock market in our head. Imagine there is no stock market and evaluate its fundamentals and understand its business.

Imagine we are talking about a business where its shareholders have invested Rs 100 altogether and this business and had made profits of Rs 117 last year. Above all this business had shared all of its profits back with its shareholders and also had given extra Rs 4 back from its shareholders contributions.

If you are the owner of this business then at what price would you like to sell it? Or will you be willing to sell this business at all?

Let’s not stop here, what if I say that next year we are expecting to make Rs 150 as profits from the business!! If you have already calculated its fair value earlier then definitely you want to change your asking price now.

These figures are not imaginary. They are all real figures, it is just we had changed it in simple terms to make it understand to investors. They all are the figures of HUL and expectations from this business for the coming years.

We are expecting its 2014 intrinsic value to be Rs 450 and Rs 623 for the year end 2015. If I hold my stocks for another two years then I am expected to be richer then what James Alison is happy to pay me today. Moreover, I have not even taken into consideration of dividends for the next coming two years. You need to decide what you want to do with your investments but we as an investor not happy to sell at Rs 600 our share in this business.