Q2 result review: ITC vs HUL – which stock to buy post earnings

HUL Results

For HUL the impact of lower input cost inflation was visible in the September quarter results and sharp improvement in gross margins  lifted its overall operating performance. The company reported Ebitda margins at 24.6% improved 130 basis points year-on-year. Ebitda stands for Earnings before interest tax depreciation and amortisation, while 100 basis points make a percent. The revenue growth and volume growth stood at just 4% and 2% respectively for HUL. The improvement in operating performance meant that HUL profits before exceptional items at ₹2,668 crore improved 12% year-on-year.

HUL- Analysts views

The analysts at Jefferies India private Ltd reacting to HUL results said that, the pitfall showed up in higher competitive activity visible in the increase in media spends along with HUL trailing industry growth. Lower product prices have yet to induce customers to consume more, partly reflecting a tough macro. Hence Jefferies view on outlook is cautiously optimistic. They said that post uninspiring results – stock price is likely to remain range-bound and they remain on the sidelines and cut Earnings per share estimates by 3-4% for FY24 and FY25, with a slightly lower price target.

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Amnish Aggarwal – Head of Research, Prabhudas Lilladher Pvt Ltd also has a Hold rating on HUL and said that the stock trades at 50.2 times to FY25 earnings estimates. Volumes were a mild miss on our estimates & recovery will continue to be gradual in nature fro HUL, said Aggarwal. The rural markets have seen mid-single volume growth (on low base) and 3Q24 will likely see tailwinds from festive season, sustained buoyancy of services and government’s thrust on capex. Any further inflation in the commodity basket, however, may arrest the gross margins and Ebitda margin recovery witnessed by HUL, added Aggarwal. He feels that as pricing element has further reduced to 1.6% (versus 3% in Q1) and future growth will now likely be volume-led,

In challenging times, the quarter is probably one of the weakest in the past few quarters across FMCG companies, said analysts at Antique Stock Broking. Going ahead, they expect a huge diversion in performance among FMCG players, while the best performer will witness re-rating. Antique also has a Hold rating on the HUL stock.

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ITC Results

Meanwhile for ITC Ltd performance though also saw impact of challenges and a high base, however was steadier as per analysts.

The Cigarette net sales and Ebit grew 8.5% and 8% with volume growth of around 5% on a high base. Analysts at Antique stock Broking said that as per our channel checks, stability in cigarette prices and increasing people mobility are helping in strong growth momentum in cigarette volume.

ITC’s stellar performance in Hotels Business with record high second quarter performance further lifted its overallQ2 performance. Segment revenue and profit before interest and tax were up 21% and 50% year-on year respectively on a high base.

The paper boards segment though saw weakness and so did Agri related businesses.

ITC’s FMCG Businesses segment revenue grew 8.3% YoY on a high base to Rs. 5,292 crores . The growth was better than HUL’s though on compared to 2-yr CAGR of more than 14.5% for ITC was still lower. Segment Ebitda margins expanded 150 bps YoY to 11%.

ITC- Analysts views and recommendations

Analysts at Jefferies India Pvt Ltd said that after nine quarters of DD growth, 2Q was the first quarter of MSD Ebitda growth. Cigarette volume growth also moderated to a multi-quarter low, although appears impressive in the context of a similar or even lower level for FMCG peers. The overall earning miss was entirely due to paperboards, which should get better ahead. While earning growth should moderate ahead, valuation at 25x P/E appear palatable in a sector which enjoys excessive premium .

Those at Antique Stock Broking , remain positive about ITC due to its steady momentum in the cigarette business and FMCG and Hotel business performance. They maintain Buy recommendation and roll forward to 1HFY26 estimates with a revised Sum-of-the Part based target price of ₹510, implying a price to earnings ratio of 25 times.

Meanwhile Aggarwal of Prabhudas Lilladher expect cigarette volume growth to moderate to 4-5% range in H2FY24. FMCG business is expected to gain from festive season, expected uptick in rural demand and scale economies. Aggarwal believes the Paper and Paperboard business is near bottom and expects sequential margin improvement in coming quarters.He expect strong growth from Hotels and FMCG to sustain given benign input costs and strong demand outlook for both domestic and foreign travel. His sum-of-the-parts based target price stands at RS 492 for ITC which is higher than their earlier target price of ₹475.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Updated: 20 Oct 2023, 12:07 PM IST