Time to ditch HUL, buy ITC?

A recent report by Sharekhan provides some interesting points of contrast between the top two fast-moving consumer goods stocks - Hindustan Unilever and ITC-and suggests that the balance may be tipping in favour of ITC.

Let’s start with stock prices. In the past week alone, HUL has jumped by 5 percent, while ITC has climbed by 7 percent.

Over the past three months itself, HUL has accumulated more gains, jumping 23 percent and touching a new life high in the process. ITC, on the other hand, has gained 20 percent over the past one year.

Sharekhan says it may now be time to favour ITC over HUL in terms of investment because of the following reasons:

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One, HUL’s stock valuations are now expensive. The relatively faster pace of gains for HUL’s shares means that they currently trade at a 22 percent premium to their average forward price-earnings (P/E) multiple of 26. Typically, the higher the P/E, the more expensive the stock’s valuation.

HUL’s share price also trades at a 38 percent premium over ITC’s price. In the past six years, the stock has traded at an average 24 percent premium to ITC in the past six year, notes Sharekhan.

Two, HUL is very sensitive to input cost pressure as its product pricing power is limited. Its products are in highly competitive segments like soaps and detergents. ITC, in contrast, has operations in businesses that are not highly price sensitive, the brokerage says.

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Three, ITC has a stronger chance of improving earnings significantly because its non-tobacco business is picking up. The company has diversified into agri-based, paper and the hotels businesses and hopes to reap full benefits going forward.

Four, ITC’s net profit is expected to grow at a compounded annual growth rate of 21 percent over the next two years compared with HUL’s estimated net profit growth of 17 percent, according to the brokerage.

The only hitch to this rosy scenario is if there is a higher-than-expected hike in excise duties for tobacco, ITC could be hit, even as input costs decline for HUL.