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Wednesday, August 20, 2008

Hindustan Unilever HUL & ITC - Stock Comparison for safe investment

(HUL) is the largest pure-play FMCG company in the country and has one of the widest portfolio of products sold via a strong distribution channel. It owns and markets some of the most popular brands in the country across various categories, including soaps, detergents, shampoos, tea and face creams.

After stagnating between 1999 and ’04, the company is back on the growth track. In the past three years, HUL’s net sales have witnessed a CAGR of 11%, while net profit has posted a CAGR of 17%. The company is set to gain further momentum, given the revival of consumer spending. HUL sells products at different price points straddled between the entire value chain. In the past few years, it has diversified into processed foods, ice-creams, water purifiers and specialised chemicals. But home and personal care (HPC) continues to remain the bread & butter segment for the company. This division accounted for 72% of HUL’s revenue and 91% of its profit (before interest and tax) during the year ended December ’07. So, it won’t be wrong to call HUL a personal care major.

The company has been launching new products and brand extensions, with investments being made towards brand-building and increasing its market share. HUL is also streamlining its various business operations, in line with the ‘One Unilever’ philosophy adopted by the Unilever group worldwide. Introduction of premium products and addition of new consumers via market expansion will be HUL’s growth drivers.

HUL’s net sales have recorded a CAGR of more than 11% over the past three years, while its net profit has posted a CAGR of 17% during the same period. While its sales have maintained a secular growth trend, profit margins have shown an erratic trend during the period. High dividend yield, steady growth and strong market standing in its product categories have enabled HUL to command premium valuations, compared to other FMCG companies.

Being an MNC operating in India, HUL is more conservative in its strategies than its Indian counterparts. Moreover, given increasing competition, it faces the risk of being overtaken by domestic players in various categories. Prolonged inflation may lead to margin contraction, in case HUL is not able to pass on this burden to consumers. The company’s large size also poses a problem, since it does not give HUL the agility to address the competition it faces from national and regional players.

HUL’s up-and-running business model is a treat for investors seeking exposure in the FMCG segment. The company has delivered in the past and has the potential to do better in future. In the small and medium term, HUL is a better bet than ITC.


ITC is not a pure-play FMCG company, since cigarettes is its primary business. It is diversifying into non-tobacco FMCG segments like foods, personal care, paper products, hotels and agri-business to reduce its exposure to cigarettes.

Despite diversification, ITC’s reliance on cigarettes is still huge. The tobacco business contributes 40% to its revenues, and accounts for over 80% of its profit. This cash-generating business has enabled it to
take ambitious, but expensive bets in new segments and deliver modest profit growth. ITC’s non-cigarette FMCG business — which contributes 15% of its revenues — eroded close to 8% of ITC’s profit last year. Its other businesses like hotels and paper together account for over 20% of ITC’s profit. Agri-business, which is its second-largest revenue earner, contributes onefourth to its revenues, but only 3-4% to its PBIT.

ITC’s backward integration to ensure that its products pass efficiently from the farms to consumers has helped it to cut down supply and procurement costs. ITC’s non-cigarette FMCG business leverages the large distribution network the company has developed by selling cigarettes over the years. A rich product mix, along with ramp-up of investments in its new sectors, will be instrumental in charting ITC’s growth path.

During the past three fiscals, ITC’s consolidated revenue has seen a CAGR of 22%. Its profit has grown at just 12% during the same period. ITC’s sales and profits have displayed a secular growth trend. But the pressure of sustaining its new businesses, as well as higher tax burden on the cigarette business, is straining its profits. After undeterred growth spanning eight quarters, ITC witnessed a marginal de-growth in net profit for the trailing four quarters ended June ’08.

Increased regulatory clamps on tobacco, along with rising tax burden, pose a business risk for ITC. So, it has started an ambitious diversification plan, which has its own set of risks. With its foray into the conventional FMCG space, ITC has entered the high-clutter branded products market. This will burden its resources in terms of ad spend and brand-building. Creating brand recall and building market share in new products are ITC’s key challenges. Export ban and rising crop prices pose a threat for its agri-business, taxing its margins.

ITC’s growth story is still evolving. ITC is eyeing the pie which HUL and other FMCG players currently enjoy. Though risky, the company’s business model will pay off in the long run. ITC has proved its expertise in the cigarettes, hotels, paper and agri-businesses. Investors who want to bank on its execution ability in FMCG can consider the stock with a long-term horizon.
Source/Credit: EconomicTimes

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