Best FMCG Stock: HUL vs ITC

Imagine a world without FMCG. Supermarket shelves are bare, with no familiar brands to grab.

Sounds unthinkable, right?

That's because the Fast-Moving Consumer Goods (FMCG) sector is the silent hero of our daily lives and the powerhouse propelling India's economic growth.

This sector boosts manufacturing, creates jobs, fuels consumption, and unlocks rural growth. It's a daily dose of economic power.

In this fiercely competitive marketplace, numerous companies are vying for consumer loyalty. Among these, Hindustan Unilever Limited (HUL) and ITC stand out as leaders, constantly innovating and competing for the top spot.

Let's see how these two companies compete on various parameters.

Business Overview

#Hindustan Unilever Limited (HUL)

Hindustan Unilever Limited (HUL) is the largest FMCG companies in India.

It manufactures and sells products in various categories, including home care, beauty and personal care, and food and refreshments.

It manufactures all its products in 30 state-of-the-art facilities located across the country. Some of its most popular brands are Domex, Dove, Horlicks, Bru, Ponds, and Kissan.

The company leads in 90% of its businesses, including skin care, hair care, ketchup, fabric wash, and household care.

#ITC

ITC is India's largest cigarette manufacturer and seller, with over 80% market share in the organised market. Apart from cigarettes, it has a presence in FMCG, hotels, paperboards, paper and packaging, and agribusiness.

The company's FMCG business is home to 25 brands across personal care, packaged goods, apparel, stationery, and agarbattis. It manufactures all its products in over 200 state-of-the-art manufacturing units located across the country.

Some of its most popular brands are Aashirvaad, Sunfeast, Bingo, Yippee, Savlon, Fiama, and Classmate.

The company also operates over 100 hotels with a room inventory of 0.29 million (m).

Moreover, ITC is the second largest exporter of agri products and a market leader in value-added products.

Particulars	HUL	ITC
Market Cap (in Rs billion)*	6,115.8	5,372.2

Source: Equitymaster|*as of 5 June 2024

If we compare the two companies in terms of marketcap, then HUL is ahead with a marketcap of Rs 6,115.8 m against Rs 5,372.2 m of ITC.

In terms of distribution reach, both companies are equally competitive but HUL slightly has the upper hand.

HUL has a presence in over 9 m retail outlets and 35 distribution hubs across the country. ITC, on the other hand, has a presence in over 7 m retail outlets.

In terms of stock market performance, both companies underperformed the market index Nifty 50.

In the last year, HUL and ITC's shares fell by 3%.

#Revenue

HUL earns the majority of its revenue from beauty and personal care products (42%), followed by the home care segment (29%), and the foods and refreshments segment (29%).

For ITC, cigarettes (40%) contribute the majority of the revenue, followed by FMCG (27%), and agribusiness (17%).

In the last five years, HUL's revenue has grown at a compound annual growth rate (CAGR) of 9.2%, a testament to its strong financial performance. Similarly, ITC's revenue grew at a CAGR of 6.6%, indicating its steady growth in the FMCG sector.

Strong growth in home care and personal care products has driven the revenue growth of HUL. For ITC, a diversified revenue profile and high growth in the cigarette business aided the company's revenue growth.

Revenue

Net Sales (in Rs m)	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023	5-Year CAGR
HUL	404,150	474,380	527,040	610,920	627,070	9.2%
ITC	490,240	500,152	480,242	580,235	673,374	6.6%

Source: Equitymaster

#Profitability

In terms of profitability, the earnings before interest tax depreciation and amortisation (EBITDA), net profit growth and expansion in profit margins of each company need to be assessed.

In the last five years, HUL's and ITC's EBITDA have grown at a CAGR of 8.7% and 7%, respectively. Both companies' net profits grew by a CAGR of 8.7%.

Operational efficiency because of its strong distribution network has helped HUL grow its profits. For ITC, the cigarettes division has helped the company's profit growth.

In terms of margins, ITC has the upper hand, with a five-year average gross and net profit margin of 38.7% and 29.4%, respectively, as against 23.9% and 29.4% of HUL.

Profitability

EBITDA (in Rs m)	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023	5-Year CAGR
HUL	96,610	113,870	128,130	140,840	146,650	8.7%
ITC	184,371	191,603	170,080	206,406	258,200	7.0%
PAT (in Rs m)	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023	5-Year CAGR
HUL	67,640	80,000	88,870	101,430	102,820	8.7%
ITC	128,359	155,928	133,829	155,031	194,767	8.7%
Gross Profit Margin	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023
HUL	24.3%	24.2%	24.4%	23.2%	23.7%
ITC	39.4%	40.4%	37.5%	36.8%	39.5%
Net Profit Margin	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023
HUL	17.0%	17.0%	16.9%	16.7%	16.6%
ITC	27.4%	32.9%	29.5%	27.6%	29.8%

Source: Equitymaster

#Debt Management

Both HUL and ITC are debt-free companies. FMCG companies have low or no debt primarily because the capital requirements are low, the profit margins are high, and hence, they have sustained cash flows.

HUL is focussing on developing new products and digitalisation. In contrast, ITC is investing in the innovation of new products across all categories, the renovation of its existing hotels, and the construction of new hotels in India and abroad.

Despite all these efforts, the companies are not looking to take additional debt, which indicates strong liquidity.

#Financial Efficiency

To measure financial efficiency, we can look at two ratios: return on capital employed (RoCE) and return on equity (RoE).

The RoCE and RoE for HUL averaged 26.3% and 19.5%, respectively, in the last five years. For ITC, the ratios averaged 34.2% and 25.6%, respectively.

Clearly, ITC has higher return ratios than HUL primarily due to higher profit margins.

However, the return ratios of both companies have been expanding in the last few years.

Financial Efficiency

ROCE	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023
HUL	113.1%	22.5%	24.4%	26.8%	27.8%
ITC	33.6%	31.8%	30.7%	34.0%	38.0%
ROE	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023
HUL	82.3%	16.8%	18.1%	20.2%	20.1%
ITC	22.5%	24.7%	22.8%	25.4%	28.5%

Source: Equitymaster

#Dividend

FMCG companies usually pay a very high dividend primarily because they are cash-rich stocks and have low capex requirements.

In the last five years, the dividend per share of HUL and ITC grew by a CAGR of 12.8% and 22.3%, respectively.

The average dividend yield and dividend payout of HUL are 1.6% and 95%, respectively, whereas for ITC, they are 4.4% and 84.8%, respectively.

Clearly, ITC's shareholders are earning a higher return than HUL's shareholders.

Dividend

Dividend Per Share (Rs)	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023	5-Year CAGR
HUL	23.0	40.5	34.0	39.0	42.0	12.8%
ITC	5.7	10.0	10.6	11.4	15.4	22.3%
Dividend Yield	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023
HUL	1.3%	1.8%	1.4%	1.6%	1.7%
ITC	2.0%	4.6%	5.4%	5.0%	4.8%
Dividend Payout Ratio	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023
HUL	80.0%	118.9%	89.9%	90.3%	96.0%
ITC	54.9%	80.0%	98.9%	91.4%	98.9%

Source: Equitymaster

#Valuations

Valuation ratios help assess a company's actual worth. Two important ratios that are widely used are price to earnings (PE) and price to book value (PB).

The PE and PB ratios of HUL are 59.5x and 11.5x, respectively, whereas for ITC, the PE and PB ratios are 25.9x and 7x, respectively.

Clearly, the shares of ITC are undervalued when compared to HUL.

However, if we compare the two companies with their five-year averages then ITC is overvalued, and HUL is undervalued.

Valuations	HUL	5-Year Average	ITC	5-Year Average
P/E (x)	59.5	61.0	25.9	20.5
P/B (x)	11.5	19.5	7.0	5.0

Source: Equitymaster

Which FMCG Stock is better: HUL or ITC?

HUL and ITC are two major FMCG giants that have leadership in their respective product categories.

In terms of revenue and EBITDA growth, HUL has the upper hand, whereas ITC is leading in terms of profit margins, dividend yield, and return ratios.

ITC started its journey as a tobacco company and diversified into multiple product categories over the years by leveraging its existing branding, distribution, and marketing strengths.

By focussing on innovation, it developed products like Yippee, Aashirvaad, and Classmate, the most popular household names in India.

Moreover, it has one of the strongest distribution network for its cigarettes which the company leverages for all its other product categories.

Going forward, the company continues to focus on innovation to develop new products and reduce the dependence on the cigarette business. Moreover, it plans to expand its hotel business, which would be a demerged entity of ITC, to increase its revenue and profits.

HUL, on the other hand, is one of the most successful companies in India. The company adopted a 'Winning in many Indias' strategy to cater to the needs of different income groups and regions.

Being the Indian arm of the Unilever group, HUL effectively combined global knowledge and resources along with local leadership to make its mark in the Indian market.

Currently, the company is focussing on the premiumisation of its beauty products range by revamping its existing brands like Lakme, Dove, and Ponds. To take advantage of emerging technologies, it focuses on digitalisation.

It is also focussing on introducing new brands and products across all its product categories.

With a growing population, rising disposable income, and high demand for premium and branded products, the FMCG sector in India is expected to witness resilient demand.

HUL and ITC, being major FMCG players in the Indian market, are set to benefit from this. However, rising raw material prices, high competition, the regulatory environment, and changing consumer preferences are some of the major challenges that could hamper the growth of these two companies.

Hence, one must practice the same caution as one does with other stocks when investing in FMCG sector companies.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...