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Business News/ Markets / Stock Markets/  ITC vs HUL: Which FMCG stock should you pick for long term?
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ITC vs HUL: Which FMCG stock should you pick for long term?

FMCG companies reported muted performance in Q3FY24 due to sluggish rural demand and increased competitive intensity, affecting overall volume growth. Amid this environment, let's analyse between ITC and Hindustan Unilever (HUL), which stock has better long-term investment opportunities.

FMCG companies reported muted performance in Q3FY24 due to sluggish rural demand and increased competitive intensity, affecting overall volume growth. Amid this environment, let's analyse between ITC and Hindustan Unilever (HUL), which stock has better long-term investment opportunities.Premium
FMCG companies reported muted performance in Q3FY24 due to sluggish rural demand and increased competitive intensity, affecting overall volume growth. Amid this environment, let's analyse between ITC and Hindustan Unilever (HUL), which stock has better long-term investment opportunities.

FMCG companies reported muted performance in the December quarter (Q3FY24) due to sluggish rural demand and increased competitive intensity, affecting overall volume growth. However, there is optimism for demand recovery in the coming quarters, which will be driven by easing inflation, increased government spending, and higher remittances. While gross margins are improving due to stable raw material prices, increased advertising spending may momentarily impact EBITDA margins but is anticipated to yield long-term benefits in market share retention.

Amid this environment, let's analyse between ITC and Hindustan Unilever (HUL), which stock has better long-term investment opportunities.

Stock Price Trend

Both ITC and HUL have underperformed the benchmark this year so far. While ITC has shed almost 11 percent in 2023 YTD, HUL has lost 10 percent in this period. In comparison, the Nifty FMCG has declined 4.5 percent and Nifty has advanced over 2 percent in this period.

Both ITC and HUL have given negative returns in both the months of 2024 so far. ITC has fallen 6.5 percent in February till date after a 4.4 percent loss in January. Meanwhile, HUL has shed 3.5 percent in February so far and 7 percent in January.

Read here: Goldman Sachs downgrades SBI, ICICI Bank, Yes Bank on growth headwinds

Meanwhile, in the last 1 year, ITC percent has gained 7 percent whereas HUL is down 3.6 percent as against an over 19 percent gain in Nifty FMCG and over 27 percent increase in Nifty.

Despite multiple record highs hit by the Indian benchmark, ITC has not followed suit. It hit its record high of 499.70 on July 24, 2023. Currently trading at 412.45, the stock is now over 17 percent away from its peak. However, it has gained almost 12 percent from its 52-week low of 369.65, hit on March 17, 2023.

On the other hand, HUL hit its 52-week high of 2769.65 on July 7, 2023. Currently trading at 2,392, it is almost 14 prcent away from its year-high. Meanwhile, it has advanced just 2 percent from its 52-week low of 2346.75, hit on February 15, 2024.

Meanwhile, in the long term, 3 years as well, ITC has emerged as the winner. The stock has given over 97 percent returns whereas HUL is up just 10 percent.

Read here: Seamec: Missed the opportunity to invest in this multibagger stock?

Earnings

ITC

ITC announced a 6 percent increase in its consolidated net profit, reaching 5,335 crore for the quarter ending in December, beating market estimates. This marks a notable rise from the 5,006 crore reported in the corresponding period of the previous year. Sequentially, net profit grew 13 percent from 4,927 crore in the September quarter. Meanwhile, its revenue from operations rose 2 percent YoY amounting to 19,484 crore from 19,020 crore same period last year. EBITDA amounted to 6,024 crore, reflecting a marginal decrease of 3.2 percent. The EBITDA margin stood at 36.6 percent, registering a decline of 180 basis points YoY.

HUL

HUL posted a standalone net profit of 2,519 crore for the third quarter of FY24, a growth of just 0.55 percent from 2,505 crore in the same quarter of last fiscal year. However, HUL’s Q3 net profit declined 7.28 percent from 2,717 crore on a sequential basis. The company’s total revenue in Q3FY24 fell 0.38 percent to 14,928 crore from 14,986 crore, YoY. At the operational level, EBITDA was flat at 3,540 crore, while EBITDA margins improved by 10 basis points YoY to 23.7 percent.

Read here: Nifty FMCG vs Nifty Finance: Which sector is better for long-term investment?

Which FMCG stock has better long-term investment opportunities?

Ajay Thakur, Research Analyst, Anand Rathi Institutional Equities likes HUL better than ITC.

We prefer HUL in the longer term given its strong and diversified product portfolio and leadership positions across several brands and segments. Also, company has kept on innovating through new products/supply chain initiatives (leveraging data analytics recently). While ITC also provides a good opportunity but given the regulatory overhang and global restrictions on tobacco, we have a more conservative view on it in the long term.

Mohit Gang, CEO, MoneyFront has also chosen HUL between the two.

ITC and HUL are both extremely high-quality FMCG stocks with remarkable pedigree, distribution reach, and managerial talent. For the last 2-3 years, HUL stock has been a dampener on performance whereas ITC has done quite well.

Going forward, my personal pick will be HUL given the great quality of management, global franchise, efficient allocation of capital, and ability to withstand competitive challenges from both organised and unorganised sectors. Currently, markets are in a phase where premium reduction between high quality (market leaders) and second/third tier companies are reducing across all sectors. But this trend won't last long and over the long term, quality should deliver. And this is where stocks like HUL in the FMCG space should again come back on the radars of investors.

ITC also will have to withstand the pressure of one of its largest shareholders BAT (holding a 29.03 percent stake) wanting to liquidate its position which should be a drag on stock performance for some time. Plus ITC will also go through demerger in the next 1 year and the hotel business will be separately listed. In effect making ITC a proper FMCG business as compared to other companies in this space.

Read here: Why Chris Wood sees 7% real GDP growth and 12-15% earnings growth going forward

On the contrary, Saurabh Jain, Equity Head, Research - Fundamentals at SMC Global Securities prefers ITC over HUL.

ITC is a diversified conglomerate with businesses spanning FMCG, Hotels, Paperboards and Packaging, Agri Business and Information Technology. It has a vibrant portfolio of 25+ world-class Indian brands that create and retain value in India. It is investing in India's future by building world-class consumer goods factories and iconic hospitality assets that will contribute to the country's competitive capacity. The company continues to enjoy leadership positions in various segments. The capacity for additional and new product launches augers well for future growth. Its focus on consumer centricity, purposeful innovation, agility, and execution excellence indicates the creation of sustained value for all stakeholders. 

In the FMCG segment, the company’s Trade Marketing & Distribution highway has transformed into a smart omni-channel network including 6 Direct to Consumer (D2C) platforms. Category-specific D2C platforms viz. Classmateshop.com, Dermafique.com, and Aashirvaad.com/Meri Chakki are being scaled up to gain consumer insights, as well as commerce.

Anirudh Garg, Partner and Fund Manager at Invasset believes the decision hinges on individual investment goals and risk appetite.

When considering ITC and HUL for long-term investment, it's essential to weigh their diverse strengths and market positions. ITC has demonstrated a commendable performance, achieving all-time highs in stock prices and showcasing solid financial metrics. On the flip side, HUL, a subsidiary of the global giant Unilever, boasts a vast portfolio across various FMCG categories. With a history of consistent growth and strong brand equity, HUL commands a premium in the market, reflected in its higher price-to-earnings (PE) ratio compared to ITC. This could potentially offer a more stable investment but with possibly limited growth upside due to the high valuation.

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Investors might favor ITC for its attractive valuation and dividend yield, appealing to those seeking value. Conversely, HUL might attract investors looking for stability and established market leadership. The decision hinges on individual investment goals, risk appetite, and the outlook on each company's growth strategy. 

Ultimately, investors must evaluate these factors in alignment with their own investment objectives and risk tolerance to make an informed decision regarding long-term investment in either HUL or ITC within the FMCG sector.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision. 

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Published: 23 Feb 2024, 12:13 PM IST
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