Hindustan Unilever Limited (HUL) and ITC are two of the biggest FMCG companies in India. In the last 5 years, while HUL has more than doubled investor wealth, rising around 125 percent, ITC has only added 3 percent.
ITC vs HUL: Which FMCG major should you pick for the long term?
Just until last year, ITC had become a meme stock with most investors and analysts joking regarding its continued decline. However, 2022 has proven to be the year for ITC. In 2022 so far, ITC is one of the biggest gainers on the Nifty50 index, up 36 percent as against an 11 percent rise in HUL.
In the last 1 year as well, ITC has outperformed, up 44 percent versus a 7 percent gain in HUL and a 16 percent rise in the Nifty FMCG index.
About the firms
Incorporated in 1933, HUL is a subsidiary of British-Dutch firm Unilever. HUL is a well-diversified company producing foods, beverages, personal care products, cleaning agents, and several other consumer goods. HUL generates revenues in excess of ₹40,000 crore, making it one of the largest FMCG companies in India. Some of its popular brands include Lux, Magnum, Cornetto, Ponds, Wheel, Rin, Elle 18, Red Label, Bru, Vaseline, and Pepsodent, among others.
Meanwhile, ITC was incorporated in 1910 as ‘Imperial Tobacco Company of India Limited’ and was renamed to ‘India Tobacco Company Limited’ in 1970. The firm completed 100 years of business in 2010, making it one of the oldest companies in India and is mainly engaged in businesses of Tobacco, other FMCG, Hotels, Paper, Packaging and Agri Commodities. The main brands of ITC include Gold Flake, Aashirvaad, Bingo and Sunfeast.
ITC is the market leader in the cigarette business with over 85 percent market share.
For the June quarter, HUL beat street estimates to clock a 13.5 percent growth in consolidated net profit at ₹2,391 crore as price hikes lifted revenues. The company's revenue from operations rose 19.46 percent YoY to ₹14,331 crore for the reported quarter, however, its underlying volume growth came in at 6 percent.
"In an environment which remains challenging, marked by unprecedented inflation and consequential impact on consumption, we have delivered yet another quarter of robust topline and bottom-line performance," said Sanjiv Mehta, CEO and Managing Director at HUL.
However, ITC is yet to deliver its June quarter results.
As per analysts, ITC is likely to post good numbers in the first quarter of the current financial year, as the agri commodities price correction will clearly benefit the company. Brokerage firm Motilal Oswal expects an 11 percent volume growth in ITC's cigarettes business. It also expects gross margin expansion of 190bp year-on-year (YoY) on better cigarette mix and reduction in lag from hotels. As per the estimates of the brokerage firm, ITC's revenue can grow 21.8 percent YoY while the adjusted PAT and EBITDA may grow 34.8 percent and 27.2 percent YoY respectively.
ITC vs HUL: Which to pick?
According to Sunil Damania, Chief Investment Officer, MarketsMojo, "Given a choice between ITC and HUL, ITC stands a better chance. We had first recommended ITC back in March 2022 to our investors, and since then, the stock has done exceptionally well. One of the reasons we believe ITC is a better performer than HUL is due to ITC's product profile. Secondly, there is a possibility of ITC restructuring. The management has indicated they would try to unlock the value of the hotel business."
He further pointed out that a closer look at ITC's valuation versus HUL shows ITC commanding a price-earnings ratio of less than 25, but HUL, India's largest FMCG company, commands a P/E of about 67, not leaving much scope for capital appreciation.
"At the same time, despite HUL's product profile and leading market share, the product profile of ITC is where the demand is more inelastic. Hence, we are bullish on ITC's performance over HUL," Damania added.
Meanwhile, analysts at Motilal Oswal have a 'buy' call on both the stocks, however, ITC is its top FMCG pick from a 1-year perspective.
For ITC, they have a target price of ₹335, indicating an upside of 12 percent while for HUL, it has a target of ₹3,000, implying a potential upside of 15 percent.
"A revival in cigarette demand, recovery in some profitable FMCG-Others categories, and a reduced lag in the hotels business coupled with lower input cost pressures than peers and attractive valuations make ITC a top pick from a one-year perspective," said Motilal Oswal.
It added that the resilient nature of its core business, amid an uncertain environment in the sector, and a 4-5 percent dividend yield make it a good defensive play in the ongoing volatile interest rate environment. The biggest chunk of ITC's revenue comes from its cigarette business. It pointed out that the volume of the company’s cigarette business has surpassed pre-pandemic levels which are helping the stock to breach its previous 52-week high.
However, for HUL, the brokerage believes that margin pressure led by commodity cost inflation is likely to persist in Q2FY23E, before sequential improvement from Q3FY23E onwards.
"Within the premium personal care portfolio, skin care is ahead of pre-Covid levels although color cosmetics portfolio is still below the pre-pandemic levels despite the recent recovery in mobility. Signs of incipient earnings growth recovery are getting better - but only gradually - fueled by a possible good monsoon, fertilizer subsidy, gradual reduction in commodity costs from the decadal high levels and recovery in premium personal care portfolio," said MOSL.
Brokerage firm Edelweiss Securities also has a buy call on ITC with a target price of ₹340. It expects legal cigarette players to gain market share from illegal players (almost one–fourth of the market) in FY23, given no tax hike for a second consecutive year. The brokerage is positive about the company's hotel business also which is expected to see a strong recovery in FY23E, although the ongoing financial crisis in Sri Lanka poses a minor challenge.
However, it is also bullish on HUL. According to brokerage, EBITDA margin compression of 110bp YoY in the Juen quarter came from continued pressure from inflationary trends as well as higher ad spends. While GM will be under pressure in the near term, improving portfolio mix, cost control and price hikes should aid EBITDA margin.
Outlook on FMCG sector
The FMCG Index has been an exceptional gainer, mainly due to two companies: Varun Beverages and ITC. However, some other players have not managed to perform as well, one of the main reasons being their commanding valuation, not leaving much scope for capital appreciation, said Damania.
"We believe that inflation-led pressure is easing for FMCG companies; costs such as palm oil, crude oil prices, packaging costs, etc., are coming down. But at the same time, competition is also on the rise. Hence, volumes would always be a challenge. Besides, if you look at the rural market, it remains a little soft as the consumer's ability to buy FMCG products has reduced. Hence, we believe that FMCG as a sector will continue to underperform even going forward. While companies such as ITC and Varun Beverages that are on our 'buy' list and have been on our 'Stock of the Month' are doing reasonably well, others may continue to struggle. Hence, it is crucial to have a stock-specific approach," he advised investors.
Note: This article is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment related decision.