ITC Vs HUL Vs Nestle: Which FMCG stock to buy post Q2 result?

Brokerages are holding bullish view on FMCG majors ITC, Hindustan Unilever (HUL) and Nestle despite the companies reporting mixed set of results for the quarter ended September 2023. Axis Securities maintained ‘Buy’ rating on ITC with a target price of Rs 540, indicating an upside of over 23 per cent against the current market price of Rs 438.

ITC on October 19 reported 6.02 per cent year-on-year growth in consolidated net profit at Rs 4898.07 crore in Q2FY24. On the other hand, consolidated gross sales increased by 3.84 per cent YoY to Rs 19,137.51 crore during the quarter under review.

According to Axis Securities, ITC’s Q2FY24 results were in line with their estimates. The cigarettes segment continued its strong momentum with volume growth of 5-6 per cent against their estimates of 5 per cent, led by market share gains from illicit trade, targeted market interventions, and new product launches.

“The stock is currently trading at 23 times FY25E EPS and a 3-4 per cent dividend yield provides a margin of safety compared to its peers. While valuations of other players stand elevated, ITC makes a better play in the entire FMCG pack on account of a stable outlook for the cigarette volume growth (led by stable taxation, market share gain from illicit trade along with new product launches), the FMCG business reaching the inflexion point with its EBIT margins inching up further, strong and stable growth witnessed in hotels, and steady and decent performance outlook in paperboard and agribusiness,” Axis Securities said.

Amnish Aggarwal, Head of Research, Prabhudas Lilladher maintained ‘Accumulate’ rating on ITC with a target price of Rs 492. “ITC EBIDTA growth at 3 per cent was below estimates due to sharp decline in paperboard segment EBIT by around 50 per cent and moderation in cigarette volume growth to 4.9 per cent on a normalised and high base. We expect strong growth from hotels and FMCG to sustain given benign input costs and strong demand outlook for both domestic and foreign travel,” he said.

On the other hand, Hindustan Unilever posted 0.34 per cent fall in consolidated net profit in Q2FY24 on 3.14 per cent YoY growth in consolidated revenue during the quarter under review.

Systematix Institutional Equities maintained ‘Hold’ on HUL with a revised target price of Rs 2,760 (Rs 2890 earlier). Shares of the company traded 1.94 per cent down at Rs 2,498 in the afternoon trade on October 20.

HUL delivered an earnings beat despite a soft volume performance led by sharp margin improvement. We maintain ‘Hold’ rating on the stock, given the weak near-term growth outlook. However, in the long-term, we expect above-industry growth going ahead led by continued premiumisation and strategic initiatives by the company,” Systematix Institutional Equities said.

On the other hand, Motilal Oswal Financial Services added that the outlook for HUL remains balanced as lower commodity costs and a gradual recovery in rural demand could be offset by reduced leverage on pricing and increased competition from smaller players in some categories. “We reiterate our ‘Buy’ rating with a target price of Rs 3,015,” Motilal Oswal Financial Services said.

The Maggi noodles maker Nestle India reported 37.28 per cent growth in net profit at Rs 908.08 crore for the quarter ended September 30, 2023. Consolidated sales of the company grew 9.44 per cent YoY to Rs 5009.52 crore. Motilal Oswal Financial Services on October 19 gave ‘Neutral’ call on Nestle with a target price of Rs 23,900. Shares of Nestle traded 1.15 per cent higher at Rs 24,398 in the afternoon trade on October 20. Meanwhile, the board of directors announced a second interim dividend of Rs 140 per share. It also approved to a share split in the ratio of 1:10. The process is expected to be completed within 2 months from the date of approval from members.

“Nestle has a strong position in the domestic food market with an innovative product portfolio. It is focused on expanding out-of-home consumption and reaching rural markets, driving sustained double-digit earnings growth. Through substantial investments in capacity enhancement, brand support, and R&D initiatives, Nestle is well-positioned to capitalise on the vast opportunities in India’s packaged foods segment, ensuring promising long-term revenue and earnings prospects. We value the company at 65 times FY25E EPS to arrive at our target price of Rs 23,900,” Motilal Oswal Financial Services said in a report.

Prabhudas Lilladher believes most of the gains from soft raw material has been derived and incremental margin expansion will come at a tepid pace as shortfall in production is likely to keep prices of edible oils, coffee, sugar, spices and wheat firm in the near to medium term.

While retaining ‘Accumulate’ rating on Nestle with a target price of Rs 25,471, Prabhudas Lilladher said, “We expect volume growth to improve as Maggi LUP price revision has mostly come in the base and Q4 will also get a boost from late Diwali. Long-term growth drivers look intact given significant capex plans of the company.”

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