A tale of 2 FMCG stocks - Hindustan Unilever and ITC

What really explains this divergence in stock performance of HUL and ITC at a time when the Nifty itself is down more than 25%?

April 09, 2020 1:50 IST | India Infoline News Service
In the midst of the Coronavirus pandemic, the one stock that has stood out is Hindustan Unilever (HUL). But, then it is not about every FMCG stock in the market. If you look at the two largest FMCG players in the market, their performance in 2020 has been diametrically opposite.

What really explains this divergence in stock performance of HUL and ITC at a time when the Nifty itself is down more than 25%?

What has worked against ITC?

The good news for ITC is that between FY16 and FY19, the share of cigarettes in the overall revenue mix has fallen from 62.70% to 45.80%. To that extent, the company continues to reduce its reliance on cigarettes. However, even today, 85% of the profits of ITC still come from the cigarettes business. That is because while paper and agri are able to generate some profits, the FMCG and hotels business have been a drag on ITC.

The sharp fall in ITC since January was primarily an outcome of the COVID-19 pandemic. There are 3 reasons. Firstly, the lockdown has ensured that loose cigarette sales through tobacconists (largest share) have come to a standstill. Secondly, health experts are of the view that respiratory pandemics like COVID-19 will only highlight the risks of smoking leading to slower growth. Lastly, investors and analysts are worried that government would be under pressure to increase GST on some products to make up for the revenue gap. Cigarettes could emerge as the favourite whipping boy and we have seen instances of that already. The stock has lost more than 50% from the peak of 2018 and the damage appears to be more structural.

Is this Hindustan Unilever’s Eureka moment?

Hindustan Unilever has emerged as the third most valuable company in India overtaking HDFC Bank. With a market cap of $76 billion, HUL already accounts for 54% of the overall market cap of Unilever globally. Hindustan Unilever has been one of the few stocks to have actually benefited from the lockdown.
  • The lockdown has made most households apprehensive of their jobs and hence are putting of any spending plans that can be postponed. Most of the cash flows are being used to consume food and related hygiene products.
  • Hindustan Unilever has been trying hard to push the concept of hygiene in India for some time. However, the fear caused by COVID-19 resulted in a major thrust on personal hygiene. Retailers admit that hygiene products are flying off the shelves. With a major share on the hygiene market, HUVR is a clear beneficiary.
  • Lockdown fears have created consumer uncertainty. While most other shops are closed, the government has only permitted food, hygiene and home needs products to be sold through retail channels. Here again Hindustan Unilever is the beneficiary.
The pandemic has given a major business case for Hindustan Unilever. At the end of the day, the product conversion for HUL post the pandemic is likely to be worth its weight in gold. That is, perhaps, what the stock prices have begun to reflect.

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