One’s loss is another’s gain!
Is that true? Not always.
But this seems to be the case when it comes to two FMCG majors—Hindustan Unilever and ITC.
Between December 2018 and February 2020, ITC has lost Rs 84,598 crore of market cap. On the other hand, HUL has witnessed a rise of Rs 94,145 crore in its market cap. In percentage terms, HUL has gained 24% and ITC has lost 24%.
Institutional investors have shunned ITC and gone gung-ho on HUL over the last 14 months.
The tobacco business has been facing steep competition from its peers as companies such as VST Industries and Godfrey Phillips have been expanding their geographical footprint quite aggressively. Tough economic conditions, hawkish taxation environment for tobacco products has been capping the pricing power of ITC.
At a time when there’s a slack in domestic consumption trends, HUL has not only been posting impressive numbers but has also been reporting margin expansion along with market share gain—a classic example of market leaders further strengthening their position during challenging economic phases.
Many experts also believe that fruits of formalization of Indian businesses haven’t been reaped completely just yet by FMCG companies in the organized sector. This leaves room for more benefits to players such as HUL.
The merger of GSK Consumer Healthcare with HUL is going to be EPS accretive for the latter.
All these factors have been confidence boosters for investors.
Ironically, the weight of HUL in the Nifty 50 index has fallen marginally to 2.94% at present from 2.99% as on December 31, 2018. The fall in the weight of ITC has been steep—from 5.55% to 4.15%. However, this has been on the account of inclusion of Nestle India in the Nifty, which enjoys a weightage of 1.1%. Interestingly, Nestle India’s market cap has increased by 52% over the last 14 months.
As per the claims of media reports, Dabur is likely to replace Yes Bank in the Nifty 50. If that happens, indeed, on one hand, investors will have a choice of going with the momentum in earnings (without minding the steep valuations) or taking a contra call and investing in undervalued FMCG stocks.
In Budget 2020, the government has increased its allocation to the Agriculture sector by 28.1% as compared to the revised FY20 estimates. Allocations to Rural development and transportation have gone up 1% and 7.2%, respectively. If all these factors translate into higher rural demand, some FMCG companies will gain an edge over others.
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