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Head-to-Head: HUL and ITC stake equal claims to India's FMCG crown

Despite a muted Q4 show amid lingering inflationary headwinds, the analyst community’s love affair with HUL has only increased.

May 30, 2023 / 06:12 AM IST
HUL vs ITC

HUL vs ITC

 
 
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The maxim ‘form is temporary; class is permanent’ would be an apt description for India’s largest FMCG firm – Hindustan Unilever. Despite a muted Q4 show amid lingering inflationary headwinds, the analyst community’s love affair with the market heavyweight has only increased.

Its more diversified peer ITC, on the other hand, posted stellar numbers, propelled by both cigarettes and staples. With more earnings visibility than its peers, ITC remains firmly ensconced at the top of market participants’ buy lists.

But is there a case for choosing one over the other? Or does the ideal portfolio need the twin engines of both ITC and HUL? Here’s how these two stalwarts stack up -

FINANCIALSAdvantage ITC

Financials: HUL’s Q4 numbers were marginally below expectations on most fronts, but it was the volume growth of just 4 percent which disappointed the Street. In fact, the 3 percent contraction in rural volumes accentuated the underlying pain points in the economy. Most analysts expect the trend to continue in the coming quarters.

"We remain cautiously optimistic, expecting mid-single-digit volume growth as the near-term operating environment continues to be challenging. Considering price cuts and increased royalty rate at 3.45 percent, we trimmed our earnings and retain 'ADD' rating," Centrum Broking said.

No such problems for ITC, whose FMCG business posted impressive figures on both growth and profitability fronts. Cigarette volumes shot up 12 percent YoY, helped also by clawback from illicit trade, while the hotels segment was lifted by the post-Covid revival in travel, which offset the weakness in paperboard and agribusinesses.

"Unlike its staples peers, ITC has reported consistently impressive performance in its Other FMCG business (19 percent revenue growth and margin improvement despite elevated raw material costs), along with robust performance in Hotels. ITC’s earnings visibility remains better than peers," analysts at Motilal Oswal said.

HUL Vs ITC

Market Moves: ITC shares have been hogging the limelight since the past year, and have emerged as the top Nifty gainer. HUL’s performance has been sedate in comparison. But a bit of context may be useful here -- HUL edges past ITC when it comes to their five-year returns.

Analyst Views: Very little to choose between the two, as both companies feature prominently on ‘buy’ lists. With zero ‘sell’ calls, ITC has a near-perfect score on the sentiment meter, though HUL has reasserted its position with an increase in ‘buy’ ratings post the Q4 results.

Valuation Premium

Valuations: HUL has traditionally commanded a higher price multiple than ITC, in line with most consumer staple firms. At a 1-year forward P/E of 52.69, HUL is trading well above its 10-year average of 46.5x.

ITC’s price multiple of 25.4x too is above its 10-year average of 22.16. Incidentally, ITC has among the lowest P/E ratios in the Nifty FMCG index, mainly due to the tax overhang on cigarettes, though the situation may be turning favourable for the company.

“The key challenges for ITC – an extremely punitive tax regime of the past, Covid-related disruption and commodity cost inflation – now seem to be receding,” according to Motilal Oswal.

However, analysts said the ITC stock’s recent run-up limits its further rerating potential, which means the P/E gap with HUL is expected to remain in the medium term.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Moneycontrol News
first published: May 29, 2023 07:23 pm

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