Shares of diversified conglomerate ITC have managed to outperform its peers in the last one year as the stock has managed to deliver over 75 per cent return to its shareholders.
Hindustan Unilever (HUL) stock is up over 9 per cent in the last one year and Marico stock is down over 1 per cent. If you look at the current share price, ITC is hovering around its 52-week high of Rs 388.20, and HUL and Marico are trading 8 and 12 per cent lower respectively.
Earnings season is almost over and Nomura noticed a stark difference in the trend within staples and discretionary. It noted that the rural market volumes continued to be impacted but showed an improvement on a quarterly basis, while urban volumes have been steady.
For HUL, it said the outperformance to market continued with more than 5 per cent year-on-year volume growth. ITC posted a strong recovery in cigarettes (+15 per cent y-y volume growth); three-year CAGR improved to 6 per cent in 3Q vs 4 per cent in 2Q. However, value growth in Parachute coconut hair oil / value-added hair oil continued to remain sluggish.
“The raw material price trends for FMCG companies are mixed, given that imports like palm, crude and related commodities have seen a sharp decline but prices of agri commodities like rice, wheat, coffee and milk prices remain firm. Though Crude prices have come off 30 per cent from their peak in May 2022 it is only 10 per cent below average in 2QFY23 and 11 per cent higher compared to the average in the third quarter of the previous financial year,” said Anil Rego, founder, and fund manager at Right Horizons.
While the effect of a downward trending inflation was not clearly visible in 3QFY23 for the FMCG sector, Rego believes that the forthcoming quarters could see an improvement.
FMCG companies are taking price cuts to perk up volumes in rural regions and margins to likely improve on a sequential basis. Nifty FMCG has been range-bound near its 5-year average PE for the past few months. He expects a re-rating if the companies witness improvement in demand and margins in the coming quarters.
Q3 Performance
ITC
ITC reported a 21 per cent jump in net profit at Rs 5,031 crore for the December quarter compared with Rs 4,156 crore in the year-ago period. ITC’s revenue rose 2.3 per cent to Rs 16,225 crore in Q3FY23 as compared to Rs 15,862 crore in Q3FY22. The company declared an interim dividend of Rs 6 per share.
HUL
HUL reported a double-digit rise in year-on-year (YoY) top and bottom-line growths for the December quarter and announced an increase in royalty payments to parent firm Unilever. HUL logged a 12 per cent year-on-year (YoY) rise in net profit at Rs 2,505 crore for the December quarter compared with Rs 2243 crore in the same quarter last year.
Marico
Marico reported a marginal increase of 1.6 per cent in its consolidated net profit to Rs 317 crore for the third quarter ended December 2021. The company posted a net profit of Rs 312 crore in the corresponding quarter a year ago. Its revenue from operations jumped 13 per cent to Rs 2,407 crore, compared with Rs 2,122 crore in the year-ago period.
What’s next?
KRChoksey believes that the cigarette business will continue to benefit from stable taxation, and it expects ITC to continue its market share gain vs illicit trade. The improving demand scenario as inflation subsides will further help the FMCG business, which is already seeing strong growth in both urban and rural markets.
The strong trajectory of the Hotels business due to re-opening and improving topline and profitability of the Paperboards, Paper, and Packaging segment due to new value-added products and other initiatives will help overall performance, it said. The brokerage has increased the target price to Rs 442 per share from Rs 400 earlier.
According to Geojit, ITC delivered positive results across all the major segments except the Agribusiness in Q3FY23. Despite the positive changes, the management has addressed global slowdown and geo-political tensions as key risks.
“Tax hike on cigarettes adds to the risk as the company drives a major portion of the revenue from the segment. We, however, remain cautious and reiterate our HOLD rating with rolled forward target price of Rs 400 using SOTP valuation,” it added.
Anand Rathi believes HUL continues to remain focused on managing its business with agility and continues growing its consumer franchise whilst maintaining margins in a healthy range. It has updated the estimates factoring in the latest numbers and continues to remain positive on the company in the long run and maintained a ‘Buy’ rating on HUL with a revised target price of Rs 2,960 per share.
Geojit believes HUL will continue to gain market share by focusing on increasing volumes by relatively lowering the prices of its products as inflation falls and rural demand increases.
It remains cautiously optimistic about healthy revenue growth and sustainable margins. The brokerage reiterated its ‘Buy’ rating on the stock with a revised target price of Rs 2,900.
ICICI Securities has maintained an ‘ADD’ rating on Marico with a target price of Rs 560 per share. It believes that the macro headwinds (commodity price volatility, rural slowdown etc.) have led to undesirable outcomes in the near term for core segments. There are lingering questions about structural growth deceleration for hair oil too (as observed in the performance of all hair oil players).
Citi has a ‘Buy’ call on Marico with a target price of Rs 585. It expects a healthy uptick across its business segments starting Q4 FY23 and believes that there is room for the stock’s valuation gap against its peers to narrow.