ITC narrows gap with HUL in m-cap race; can it pip the soap maker?

The gap between the market capitalisation (m-cap) of diversified conglomerate ITC and FMCG major Hindustan Unilever (HUL) has narrowed down sharply during the past 16 months. Amid the ongoing rally in the shares of ITC, the market capitalisation of the company has jumped to Rs 5.28 lakh crore on April 28, 2023 from Rs 2.70 lakh crore on January 3, 2022, showing an addition of Rs 2.58 lakh crore on the company’s m-cap during the period.

On the other hand, the m-cap of HUL increased by just Rs 21,581 crore to Rs 5.77 lakh crore from Rs 5.55 lakh crore during the same period. Following the outperformance in ITC, the difference between HUL and ITC’s m-cap narrowed down to Rs 48,306 crore on April 28, 2023 from Rs 2.85 lakh crore on January 3, 2022. ITC earlier this week piped IT major Infosys to become the sixth largest company in terms of market valuation. For ITC to pip HUL, it needs another 9.14 per cent rally at the prevailing market price.

Will the ongoing momentum in the ITC shares continue? Ravi Singhal, CEO, GCL Broking said, “Both ITC and HUL are market leaders in their respective categories, however, ITC is significantly cheaper than HUL in terms of valuation. HUL is experiencing stiff competition in cosmetics, shampoo, and toiletries. However, washing powder and cake are doing well. The arrival of several start-ups and large retail competitors has also made it tough for HUL.”

On the other hand, Singhal added that ITC maintains dominance in all major segments such as cigarettes, hotels, paper, agriculture, Ashirvad Atta, and even dark fantasy. “We think still ITC will outperform HUL due to its attractive valuation. Share of ITC may touch Rs 470 in the next 1 year,” the market watcher said.

For the quarter ended March 31, 2023, Hindustan Unilever on April 27 posted a nearly 10 per cent YoY rise in profit at Rs 2,552 crore and around 11 per cent growth in its revenue at Rs 14,638 crore. On the other hand, ITC is yet to announce its March quarter results.
Sharing its view on the Q4 results of HUL, Centrum Broking in a report said, “HUL Q4FY23 print was below our estimates. To maintain price-value equation, HUL initiated price cuts in detergent, soaps and BPC portfolio, yet expects gross margins to improve despite a likely increase in media spending. We remain cautiously optimistic expecting mid-single-digit volume growth as the near-term operating environment continue to be challenging. Considering price cuts and increased royalty rate at 3.45 per cent we trimmed our earnings and retain the ‘Add’ rating with a target price of Rs 2,703,” the brokerage said.

Earlier, ITC and HUL posted 26.88 per cent and 14.37 per cent YoY growth in net profit for the nine months ended December 31, 2022.
Shares of ITC gained 95 per cent to Rs 425.55 on April 28, 2023 from Rs 218.05 on December 31, 2021. On the other hand, HUL advanced 4.12 per cent to Rs 2457.30 from Rs 2,360.15 during the same period.

Ravi Singh, Vice President and Head of Research, Share India said, “ITC outperforms HUL due to its consistent success in quarterly figures, which take cues from demand recovery in the cigarette and hotel businesses, cost optimisation, and trending sales momentum in the FMGC industry. Cigarette tax stability, backed up by deterrent actions by enforcement agencies, allows for continuous volume recovery.”

He further said that HUL also has a favourable long-term view in terms of operating margin improvement, which is being driven by better penetration-led growth, which may lead to higher operational leverage as well as the launch of premium brands.

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