I recently read an article on www.Moneycontrol.com with a heading ”HUL overtakes ITC in Market Cap, should investors switch sides?” While the article mainly shares views of various brokerage houses and their view on both the companies, I was more interested in analyzing both the companies based on rational grounds such as their past performance and future growth potential.
After reading the article, I went back and analyzed both the companies to compare and understand which company provides better value and growth potential. What I observed was amazing and eye opening. What I am going to share with you is a detailed comparison between both the companies on various aspects such as sales, profitability and valuations.
In this section we will compare and analyze the financial performance such as Sales, Net Profit, and cash Flow of both the companies.
Sales Growth: In the past 5 years ITC has seen much better sales growth compared to HUL. From 2013 to 2017, While HUL has seen a sales growth of 4.32% CAGR, ITC on the other hand has seen a growth of 6.04% CAGR, higher than HUL
Net Profit Growth: The profit growth of ITC has been much better than that of HUL. While HUL posted profit growth of 3.42% CAGR from 2013 to 2017, ITC on the other hand posted much higher profit growth of 6.58% CAGR.
Operating Cash Flow Growth: Not just Profits, ITC has generated more cash, faster than HUL. In the last 5 years, HUL has posted operating cash flow growth at 7% CAGR while ITC is slightly ahead of HUL and posted a growth of 7.5% CAGR.
Profitability is a measure of how efficiently a company is able to convert its sales into profits. Higher Profitability shows that company is able to generate better sales at low cost, thus leaving more cash in the hands of the company. Some of the Profitability measure are Net Profit Margin and Operating Profit Margins.
Net Profit and Operating Profit Margins: As per the latest annual result, The Net Profit Margin of ITC is at 25% which is much higher than HUL which is at 14%. Similarly, if we compare operating profit margin of both the companies ITC has posted much better Operating Profit Margins Growth of 36% against HUL which is at 26%
The point I am going to make here is the most interesting part of the entire analysis. ITC, being a cigarette manufacturer has been burdened by heavy taxes, which is apparent from the face that ITC pays 52% of its Net Profit as tax while HUL pays only 42%.
Despite such huge taxes, ITC is able to generate better profit growth and profit margins compared to HUL.
ITC is putting all its efforts to reduce its dependence on cigarettes as a major source of revenue, which has started to show results. In the future, as ITC diversifies to other businesses, Its tax burden will reduce, thus improving profit margins.
Finally, the most important part of the analysis, the valuation which shows how much we are paying and what we get in return. There are two ways to value a company:
First based on earnings, which is represented by P/E ratio, which shows how much an investor is paying against each rupee earned by the company.
Second is based on the comparison between the market value and the business value of the company which is represented by comparing market capitalization (market value) to Net Worth(Business value)
ITC is now becoming a pure FMCG company just like HUL, assuming that both are in the same sector, If we look at the P/E ratio of ITC and HUL. ITC is trading at a P/E of 31 while HUL is trading at a P/E of 66. Clearly ITC despite being a better performer is trading at lower valuation compared to HUL
Now the second valuation method is comparing company’s Net worth to Market Capitalization. HUL has recently surpassed ITC in market capitalization, which at first seems great but if you compare the market valuations of both the companies you will find that HUL is much more expensive compared to HUL.
To make a fair comparison, we will divide the total Market Capitalization by company’s total Net worth. Currently HUL has market capitalization of Rs.3,47,580 crores, while its net Worth is Rs. 6,490 crores. Which means HUL is trading at 53 times its Net worth. On the other hand, ITC has a Market Capitalization of Rs.3,44,527 crores while its Net Worth is Rs. 45,340 crores, which means ITC is trading at 7.6 times its Net worth.
Even after having such good fundamentals, ITC has underperformed not only its peers but also broader markets and is currently trading at attractive valuation from a long term view. ITC also has many ambitious plans for the future, such as diversification to chain of Multispeciality Hospitals, expansion of its FMCG business especially in frozen foods, sauces and condiments. Company is targeting a revenue of Rs. 100,0000 crores from its FMCG segment which currently stands at Rs. 10,000 crores.
Looking at all the above mentioned factors, ITC has performed much better than HUL in the past and is available at better valuations, making it a great candidate for long term investment.