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Why ITC scores over HUL in battle among equals

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ITC and HUL are analysts' pets -- both are defensive stocks and widely tracked. But that is where the similarities end. The stories of India's biggest cigarette seller and the country's largest FMCG major are a stark contrast. 

 
While ITC is trading close to its 52-week highs, HUL has slipped sharply over the past few weeks. Over the last quarter since December 12, 2012, ITC shares have slipped only 1.6 per cent compared to a steep 16 per cent decline in HUL shares. The broader Sensex has gained 0.6 per cent over the same period.
 
ITC's relative outperformance is all the more surprising because the company continues to face tax highs year after year. 
 
"What does a Finance Minister turn to when he requires resources? The answer is cigarettes. I propose to increase the specific excise duty on cigarettes by about 18 per cent. Similar increases are proposed on cigars, cheroots and cigarillos," Finance Minister P Chidambaram said in his Union Budget speech last month.
 
Here's why investors continue to like ITC shares:
 
1) Anand Mour, FMCG analyst at ICICI Securities, told NDTV Profit that even after an 18 per cent excise duty hike and factoring in an average 5 per cent hike in value added tax across states, ITC may manage a 2 per cent volume growth.
 
2) ITC is likely to hike prices across its portfolio by up to 18 per cent in 2013-14, Mr Mour said, but the company may still end the year with an operating profit growth in excess of 20 per cent.
 
3) Cigarettes account for just 15 per cent of overall tobacco consumption in India so there is huge scope of growth.
 
"Every market I visit, there is a clear sense of consumers shifting from bidi to cigarette," Mr Mour said.
 
4) ITC provides earnings predictability like no other company does.
 
5) ICICI Securities has a 'buy' call on ITC with a target of Rs 372. The target builds in a 22 per cent compound annual growth rate (CAGR) growth in earnings. ITC's FMCG business is likely to break even in fiscal 2013-14, which will be a trigger for the stock.
 
While things are looking up for ITC, HUL may see major headwinds in the short to medium term, analysts said. 
 
"Competitive advertisements are increasing. Promotions, new launches are rising. This has led to more competitive aggression in the coming months, leading to pressure on margins and ad warfare. So, your earnings predictability reduces on the stock," Mr Mour said.
 
ICICI Securities has a 'reduce' call on HUL with a target of Rs 418.

Story first published on: March 13, 2013 11:53 (IST)

Tags: ITC, HUL, ICICI Securties, Anand Mour, BSE 30

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