Comparative Analysis – ITC vs HUL | Comparing Downside Risk vs Upside Potential
A Comparative analysis, ITC vs HUL will help you evaluate which one is a better bet from the valuation angle, based on their downside risk and upside potential. Lets also compare the financial performance of HUL and ITC’s FMCG segment.
ITC vs HUL | Which One is Better? Valuation Angle
- HUL is India’s largest listed Fast Moving Consumer Goods (FMCG) company by market capitalisation. It is the most valued FMCG company in the India stock market with market capitalization at Rs.4.72 Lakh Crore.
- While the second largest FMCG player after HUL is ITC Ltd with a market capitalization at Rs.2.33 Lakh Crore.
- What is the Downside Risk and Upside Potential for these 2 stocks?
Comparing Downside Risk & Upside Potential of ITC & HUL
- Amid the current uncertain market as well as economic outlook due to COVID pandemic, an investor need to evaluate the downside risk of a stock before investing in it.
- Basically, Downside risk of a stock is the estimation / probability of the stock to suffer decline in value if market conditions changes unfavorably. Up to how much extent the share price of any stock can fall under eroding market conditions.
- As far as ITC Ltd is concerned, there is very limited downside risk for the ITC stock. How?
- The current Price to Earnings Ratio (PE ratio) of ITC is at 15.6. While Historical Median PE Ratio of ITC is 33.1.
- Thus, ITC stock is currently trading at a very Good Discount to its Historical Valuations.
- The current PE ratio (15.6) is at discount to even 2008 Financial crisis, where the PE ratio of ITC was around 19-20.
- Thus, we can say that there is very limited downside risk.
- Whereas downside risk for HUL Ltd considerably higher than that of ITC Ltd.
- HUL is currently trading at PE Ratio of 68 and its Historical Median PE Ratio is 33.1.
- Thus, HUL is trading at a premium valuation to its historical valuations.
- So, amid the current COVID uncertainties, there is a high chance that the stock may get corrected, posing a comparatively higher downside risk than ITC.
- The upside Potential of a stock can be explained as the amount by which the stock is expected to rise in the short-term.
- Since ITC is currently trading at a discounted valuation to its historical average, there is very high upside potential for the stock.
- It is rapidly scaling up its FMCG business portfolio in a profitable manner with the recent announcement of acquiring Sunrise Foods, a Spices Manufacturer.
- Sunrise is a clear market leader in eastern India in the fast-growing spices category with a rich heritage and brand legacy of over 70 years
- This deal will augment ITC’s product portfolio and is also aligned to its aspiration to significantly scale up its spices business and expand its footprint across the country.
- The upside potential of HUL is also very good due to its expanding product portfolio, recent merger with GSK Consumer Healthcare.
- However, being a premium stock already, the upside potential of HUL is lower than that of ITC Ltd.
Comparing HUL & ITC Based on Financial Parameters
- A robust outlook of HUL is driven by recovery in rural consumption and the company’s brand reach and leadership are expected to keep the volume momentum strong.
- For Trailing Twelve Months (TTM), HUL’s Revenue = Rs.40,000 Cr
- Similarly, ITC has a footprint in a diversified business segments – Cigarettes, FMCG, Hotels, Agri, Paper and Packaging etc. It has been achieving a leadership in all the business ventures it had explored in India.
- ITC’s TTM Revenue = Rs.52,000 Cr
- Around 41% of the total consolidated revenue comes from its Cigarettes/ Tobacco business. Over last 15 years, the revenue share of Cigarettes/ Tobacco business has been declining consistently from 80% to 41%.
- While, Other segments in FMCG like food, apparel, consumer goods and stationary witnessed a phenomenal sales growth.
- This gives a clear indication that ITC stock in future is sure to rise high, as the company continue diversifying its products.
- This, in turn, will help the investors to derive benefits from ITC for a long term investment.
Net Profit (TTM)
- HUL = Rs.6,700 Cr
- ITC = Rs.15,000 Cr
- HUL = 1.10%
- ITC is providing a good dividend yield of 3.02%.
- HUL’s Current Market Capitalization = Rs.4.72 Lakh Ct
- ITC’s Current Market Capitalization = Rs.2.33 Lakh Crore
- Lets try to decode the valuation of ITC’s FMCG Business.
- Segment Revenue from ITC FMCG Business (TTM) = Rs.13,000 Cr
- If we consider ITC’s FMCG business to have the same premium valuation as that of HUL, then the valuation of ITC’s FMCG Business comes at around Rs.1.55 Lakh Crore.
- If ITC’s FMCG business list seperately, it will surely get the same premium valuation of other FMCG players.
- The main drag for the dampened and lower PE ratio of ITC Ltd is its Cigarettes/ Tobacco business. The company’s Cigarette business is clearly not giving the higher valuation to its FMCG business it deserves.
- Institutional Investors (FIIs & DIIs) highly prefer the stocks which qualify well on ESG parameters (Environmental, Social and Governance).
- And because of the Cigarettes/ Tobacco business, ITC does’t get qualified on Social parameter.
- If ITC’s FMCG business is listed seperately, its valuation would definitely shine over other FMCG players.