For ITC, revenue of non-cigarette FMCG recorded double-digit growth, a healthy sign of the company’s future growth trajectory
The two oldest FMCG conglomerates in India, Hindustan Unilever Ltd (HUL) and ITC have reported September quarter results. While HUL's profit beat street expectations, ITC's was in line with average estimates.
For HUL, the home care, personal care, and food items-diversified FMCG, analysts estimated 8.5 percent volume growth and 10 percent overall sales growth for the September quarter. HUL beat this estimates reporting 10 percent volume growth and overall sales growth of 11.5 percent year-on-year. HUL's net profit also beat estimate with 19.5 percent growth.
Oral-care brands Close up, Pepsodent and Aayush are still not meeting internal expectations. But these brands are doing well in central and north India markets.
In the personal wash segment, premium brands such as Pears, Dove, continue to positive results; however, there are a lot of opportunities to improve the growth rate in Lux and Lifebuoy.
In the ice‐cream space, the management highlighted the acquisition of Adityaa Milk Ice Creams, which provides a differentiated business model. It will focus on its core market (Karnataka) along with adjoining markets of Maharashtra, Goa, and Kerala.
In August this year, HUL acquired Karnataka-based ice-cream brand Adityaa from Vijaykant Dairy and Food Products (VDFPL) for an undisclosed amount.
“We estimate better-than-expected volume growth with rural (demand) improving and return of price hikes,” brokerage firm Edelweiss Securities said in its HUL review report.
The core business of HUL has shown a geographical expansion with many products ranges appealing to rural India.
Commenting on the results, Sanjiv Mehta, Chairman and Managing Director, HUL, said, “Rural growth is ahead of urban growth by 1.25 times (in the September quarter). But we will have to wait and see how the rural demand scenario pans out in the forthcoming quarters."
It is generally observed that rural growth is dependent on the monsoons. While some areas recorded adequate rainfall, as per Skymet estimates, overall rainfall is recorded at 91 percent.
Kolkata-based ITC, which has since long diversified from a cigarette company to hotel chains, food and paper products, and fragrance materials, reported 15.4 percent revenue growth and 11.9 percent profit rise, largely in line with consensus estimates.
Revenue of non-cigarette FMCG grew double-digit, a healthy sign of the company’s future growth trajectory.
With travel and tourism increasing in India, the hospitality business also posted 20 percent plus growth. ITC is a successful case study in the modernisation of business through winning diversification to the extent that the share of old tobacco line of business has shrunk.
In the last 8 years, its dominance has reduced from 62 percent to 40 percent now.
Together, fast-moving consumer goods, hotels, and agriculture segments contribute around 50 percent to the total sales, while cigarettes make up for 40 percent of the top line. Sales of paperboards, paper and packaging contribute the balance and rose 9 percent on year during the quarter.
Although the Kerala floods did affect HUL and ITC's sales and stockpiles, the overall impact was limited.
In terms of ITC, Kotak Securities in its brokerage report stated, “We have tweaked our forecasts marginally and raise our September 2019E (estimated) fair value target to Rs 330/share from Rs 310 earlier.
“We value the cigarette business at 24X post-tax EBIT and the FMCG business at 5X EV/sales. We remain positive; ITC is the only large-cap stock in the sector where the current valuations factor in a less-than-super-optimistic view of the future,” Kotak Securities added.
Competition from unorganised segment
That said, the two doyens of FMCG business in India continue to face stiff price competition from the unorganised sector and product range competition for unlisted ones like Patanjali.
The future long-term trajectory of FMCGs in India depends on their timely entry in new product ranges at competitive prices that cater to the rising lifestyles of urban and rural India.HUL and ITC's history in the country dates back to the pre-independence era and they are by far, the only two listed Indian FMCG companies with maximum product range.