ITC or HUL: Which FMCG Stock Is Ideal for Long-Term Investment?

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FMCG firms faced subdued results in Q3FY24, influenced by sluggish rural demand and heightened competitive pressures, impacting overall volume expansion. In this context, let’s assess the long-term investment prospects of ITC and Hindustan Unilever (HUL).

FMCG companies experienced subdued performance in Q3FY24 due to slow rural demand and heightened competitive pressures, impacting overall volume growth. In this scenario, let’s compare ITC and Hindustan Unilever (HUL) to determine which stock presents more favorable long-term investment opportunities.

FMCG firms recorded subdued results in the December quarter (Q3FY24) owing to slow rural demand and heightened competitive pressures, impacting overall volume growth. However, there is optimism for demand recovery in the upcoming quarters, driven by easing inflation, heightened government spending, and increased remittances. Despite stable raw material prices enhancing gross margins, a temporary impact on EBITDA margins is expected due to heightened advertising spending, with anticipated long-term benefits in market share retention.

In this scenario, let’s assess the long-term investment prospects between ITC and Hindustan Unilever (HUL) to determine which stock holds better opportunities.

Stock Price Trend

Both ITC and HUL have demonstrated weaker performance compared to the benchmark in the current year. ITC has witnessed a decline of nearly 11 percent in the year-to-date (YTD) of 2023, while HUL has experienced a loss of 10 percent during this timeframe. In contrast, the Nifty FMCG has seen a decrease of 4.5 percent, while the overall Nifty has shown a positive movement, advancing over 2 percent in the same period.

Both ITC and HUL have not performed well in the first two months of 2024. ITC experienced a 6.5 percent decline in February, following a 4.4 percent loss in January. Similarly, HUL showed a negative trend with a 3.5 percent drop in February and a 7 percent fall in January.

Over the past year, ITC has seen a modest 7 percent increase, but HUL has faced a downturn with a 3.6 percent decline. In the same period, Nifty FMCG saw a robust 19 percent rise, and Nifty surged by over 27 percent.

Despite the overall market hitting new highs, ITC didn’t join the rally. Its record high of ₹499.70 was reached on July 24, 2023. Presently, trading at ₹412.45, the stock is more than 17 percent below its peak. However, it has rebounded by almost 12 percent from its low of ₹369.65 on March 17, 2023.

In contrast, HUL reached its highest point at ₹2769.65 on July 7, 2023. Presently, trading at ₹2,392, it’s nearly 14 percent below its peak but has only inched up by 2 percent from its low of ₹2346.75 on February 15, 2024.

Looking at the long term, specifically over three years, ITC has outperformed. With returns exceeding 97 percent, it has clearly surpassed HUL, which has seen a modest increase of just 10 percent during the same period.

Earnings

ITC

On a recent announcement, ITC revealed a 6 percent boost in its combined net profit, reaching ₹5,335 crore for the quarter ending in December, surpassing market expectations. This is a noteworthy increase from the ₹5,006 crore reported in the same period of the previous year. In comparison to the preceding September quarter, the net profit has surged by 13 percent from ₹4,927 crore. Simultaneously, the revenue from operations witnessed a 2 percent YoY increase, totaling ₹19,484 crore compared to ₹19,020 crore in the corresponding period last year. The EBITDA stood at ₹6,024 crore, showing a slight dip of 3.2 percent. The EBITDA margin recorded a YoY decline of 180 basis points, settling at 36.6 percent.

HUL

HUL recorded a standalone net profit of ₹2,519 crore in the third quarter of FY24, showcasing a minimal growth of 0.55 percent from ₹2,505 crore in the corresponding quarter of the previous fiscal year. However, on a sequential basis, HUL’s net profit for Q3 saw a decline of 7.28 percent from ₹2,717 crore. The company’s total revenue in Q3FY24 experienced a slight drop of 0.38 percent, amounting to ₹14,928 crore compared to ₹14,986 crore YoY. Operationally, EBITDA remained steady at ₹3,540 crore, and EBITDA margins improved by 10 basis points YoY, reaching 23.7 percent.

Which FMCG stock offers superior long-term investment prospects?

Ajay Thakur, a Research Analyst at Anand Rathi Institutional Equities, prefers HUL over ITC.

In the long run, we favor HUL because of its robust and varied range of products, along with its leading positions in various brands and segments. The company consistently innovates with new products and supply chain initiatives, including recent efforts in leveraging data analytics. While ITC also presents a good opportunity, concerns about regulations and global restrictions on tobacco make us more conservative about its long-term prospects.

Mohit Gang, CEO of MoneyFront, has opted for HUL over the other option.

ITC and HUL are top-notch FMCG stocks with impressive backgrounds, extensive distribution networks, and skilled management. Over the past 2-3 years, HUL’s stock performance has been less impressive compared to the relatively successful performance of ITC.

Looking ahead, I personally prefer HUL because of its excellent management, global presence, smart capital allocation, and resilience against competition from both organized and unorganized sectors. Presently, there’s a phase in the markets where the premium difference between high-quality (market leaders) and second/third-tier companies is narrowing across all sectors. However, this trend won’t persist for long, and in the long term, quality is expected to shine. This is why stocks like HUL in the FMCG space should regain the attention of investors.

ITC is also facing the challenge of dealing with pressure from one of its major shareholders, BAT (holding a 29.03 percent stake), looking to sell its shares, which might impact the stock performance for a while. Additionally, ITC is set to undergo a demerger within the next year, with the hotel business being listed separately. This move will transform ITC into a focused FMCG business, distinguishing it from other companies in this sector.

Contrarily, Saurabh Jain, Equity Head, Research – Fundamentals at SMC Global Securities, favors ITC over HUL.

ITC is a diverse conglomerate engaged in FMCG, Hotels, Paperboards and Packaging, Agri Business, and Information Technology. With a dynamic portfolio featuring over 25 top-notch Indian brands, ITC is actively investing in the nation’s future. The company’s commitment to building world-class consumer goods factories and iconic hospitality assets strengthens India’s competitive capabilities. ITC maintains leadership positions across various segments, with the potential for further growth through additional product launches. Emphasizing consumer-centricity, purposeful innovation, agility, and execution excellence, ITC aims to create sustained value for all stakeholders.

In the FMCG sector, the company’s Trade Marketing & Distribution network has evolved into a smart omni-channel system, incorporating 6 Direct to Consumer (D2C) platforms. Specific D2C platforms like Classmateshop.com, Dermafique.com, and Aashirvaad.com/Meri Chakki are expanding to gather consumer insights and facilitate commerce.

Anirudh Garg, Partner and Fund Manager at Invasset, suggests that the choice depends on individual investment goals and risk appetite.

When evaluating ITC and HUL for long-term investment, it’s crucial to assess their distinct strengths and market standings. ITC has exhibited impressive performance, hitting record stock highs and displaying robust financial indicators. Conversely, HUL, a Unilever subsidiary, features an extensive portfolio across diverse FMCG categories. With a track record of steady expansion and formidable brand recognition, HUL holds a premium position in the market, evident in its elevated price-to-earnings (PE) ratio compared to ITC. This might present a more secure investment but potentially with restricted growth prospects due to the lofty valuation.

Investors may lean towards ITC for its appealing valuation and dividend yield, making it attractive for those seeking value. On the other hand, HUL could draw investors seeking stability and a well-established market leadership position. The choice depends on individual investment goals, risk tolerance, and the perspective on each company’s growth strategy.

In the end, investors should assess these factors in line with their own investment goals and risk tolerance to make an informed decision regarding a long-term investment in either HUL or ITC within the FMCG sector.

Disclaimer: The opinions and suggestions provided above belong to individual analysts or brokerage firms, not digitallpaisa. We recommend investors consult certified experts before making any investment decisions.

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