Hindustan Unilever Ltd. and ITC Ltd. have the same market capitalisation for the first time in over thirteen years.
What’s different this time is that HUL’s market capitalisation has risen and caught up with that of ITC – a reversal of what markets witnessed in September 2004. The share prices of both companies have moved parallelly since then and their valuations have converged in the last 12 months.
HUL’s net sales grew over 7 percent in financial year 2017-18 aided by a double-digit volume growth in the last two quarters. This was led by key brands like Lux, Dove and Wheel.
“Because of its robust distribution model and wide product portfolio, HUL is best-placed to harness growth arising from the informal sector becoming formal,” said Naveen Kulkarni, analyst at Phillip Capital.
In contrast, ITC’s net sales grew a subdued 2 percent due to a decline in its cigarette volumes, broking houses Edelweiss, IDFC Securities and Axis Bank said in their earnings notes. A half of the company’s gross sales come from cigarettes. The levy of an additional cess over and above a Goods and Services Tax rate of 28 percent on cigarettes in 2017 prompted ITC to hike prices, which dragged volumes, according to Motilal Oswal Securities.
“Possible increase in GST rates in the subsequent GST Council meetings remains an overhang. If ad valorem duty is increased, it would sour the investment case further,” Krishnan Sambamoorthy, an analyst at Motilal Oswal Securities, said.
HUL Commands A Premium
HUL’s return ratios are superior to those of ITC.
While ITC enjoys higher operating margins, the cigarette major’s return on equity for the financial year 2017-18 stood at less than 25 percent whereas that of HUL was over 75 percent. That’s also the case with the return-on-capital employed for the two companies.
With the status quo on tax rates in Union Budget and recent GST meetings, IDFC Securities expects a gradual recovery in cigarette volumes and a commensurate uptick in Ebit growth for ITC, the brokerage said in a note.