Clash of Titans : HUL vs. ITC

04/28/2019

Clash of Titans : HUL vs. ITC

HUL and ITC are undoubtedly the titans of Indian FMCG industry. Both the companies regularly keep interchanging the title of the most valued FMCG firm in India basis the stock price movements. Diversified portfolio, consistent growth and dividends make both of them the favorites for investors.

But, which of these companies are a better buy now ? Let’s find that out.

Business Advantage

HUL has dozens of very well known brands across beauty and personal care (45.8% of the total revenues), home care (32.55% of the total revenues) and foods and refreshments (14.71% of the total revenues). Some of the leading brands in their categories include: Surf Excel, Rin, Lifebuoy, Lux, Sunsilk, Fair and Lovely, Clinic Plus, Dove, Kissan, Brooke Bond, etc.  HUL has been increasing its sales at around 11% for the last 5 quarters. It also acquired  GSK consumer recently to become the largest foods and refreshments business in the country. HUL has built a massive distribution network in the country with even the most remote villages within its reach. In almost all categories, there are brands targeting consumers from different segments of the society.

HUL Brands

             HUL Brands

`Though there was some competition from the likes of Patanjali, HUL has defended its growth well by launching herbal products. With dozens of iconic brands, massive distribution setup, strategic acquisitions and best talent, HUL seems very well positioned to continue driving the growth of Indian consumption story.

HUL sales growth and margins

  HUL sales growth and margins

With brands like Wills and Gold Flakes, ITC (Indian Tobacco Company) has been known to Indians as a cigarette company. But with time, they have diversified into Food, personal care, education stationery, agribusiness, paper and packaging, retailing, IT and hotels businesses. Though, the cigarette business was highly profitable for ITC with almost 70% EBIT margins, ITC decided to aggressively diversify into the FMCG segment. “Create the new ITC” strategy aims to drive ITC non cigarette packaged goods revenues to 1 trillion INR by 2030. The reason for this remains the increasing taxes and duties levied on cigarette by the government and also the negative image of cigarettes because of possible health hazards.

ITC Brands

ITC Brands

Cigarettes continue to account for 45% of the revenues and almost 73% of the EBIT. The FMCG business consists of many upcoming brands which are gaining traction with the Indian consumers. Some of them are: Yippie, Sunfeast, Bingo, Aashirwad, Fiama, Vivel, Engage, Savlon, B Natural. Compared to the established and well known brands of HUL, ITC’s FMCG brands are still being established and would require more spend on advertising and push strategies. ITC’s distribution is as massive as HUL’s. Though the FMCG business contributes to almost 30% (3201 crores INR in Q3 2018) of the firm’s revenues, the EBIT came out as a meagre 77 crores only. This shows the kind of investment and expenses that are being incurred in establishing the FMCG business.

ITC revenue segment wise

  ITC revenue segment wise

ITC results segment wise                           ITC results segment wise

Despite of ITC’s high margins in the cigarette business, their FMCG margins have very low margins as it is still being established. HUL has the overall advantage as all of its business lines are established and mature with healthy margins.

Financials and Valuations

Let’s take a look at the financials of both the companies. The figure below have been taken from TTM to ensure most recent numbers are taken into account.

Metric HUL ITC
Market Capitalization 377,470 crores 373,459 crores
Revenue 36,854 crores 43,061 crores
PAT 5,849 crores 11,915 crores
Earnings per share 27.01 9.76
Dividend Yield 1.15% 1.69%
Net Profit Margin 15.16% 27.62%
Cash 3,485 crores 2,899 crores
EV/EBITDA 36.35 17.53
Price Earnings 64.54 31.34

The market capitalization of both the companies is approximately same despite ITC having higher revenue. ITC’s PAT is more than double the PAT of HUL on account of higher cigarette margins and has been a better dividend payer than HUL. Both the companies have decent cash on books and low debts. On the valuations front, ITC looks much cheaper than HUL on both P/E and EV/EBITDA ratios. Hence, on financials and valuations, ITC has the advantage.

Final Vedict

Despite of HUL having a more matured portfolio, ITC’s valuations look much more comfortable at this point. Hence, it would be better to invest in ITC on dips. ITC’s dependence on cigarettes will continue in coming times as the FMCG profits remain minuscule. But, ITC can combat any new taxes, duties on cigarettes by raising prices as the category is not very price sensitive. The growth in FMCG, Hotels and Retail would continue with improved FMCG margins in coming times.

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Disclaimer: I am not a SEBI registered analyst and not advising anyone to buy. The purpose of this article is to share my viewpoint about fundamentals and the future prospects of the company. So, please do not consider this as an investment tip. Talk to your financial advisor before taking any investing call.

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