Hindustan Unilever vs Nestle India: Which stock may outperform going ahead?

NEW DELHI: Shares of Hindustan Unilever (HUL) have climbed over 14 per cent year-to-date against a 3 per cent fall in Nestle India shares during the same period. But if one were go by what ICICI Securities says, Maggi-maker Nestle India may outperform the soap maker in the long term, led by multiple favourable factors, both extrinsic and intrinsic.

Volume vs premiumisation
ICICI Securities in a September 25 note said Nestle India has relatively lower salience from rural areas compared with HUL that has been a pioneer in driving penetration-led growth in rural areas through smaller packs and brand architecture. 

It noted that rural regions are one of the large drivers of volumes for most of the FMCG companies.

"Nestle is implementing a strategy to further drive penetration-led growth through customised portfolio, localised communication, building consumer connect, higher visibility and building infrastructure," ICICI Securities said.  

The brokerage said Nestle through its strategy will likely drive rural penetration for its products leading to volume growth, adding that the FMCG major has also started disclosing growth for various town classes. 

HUL, it said, has been a pioneer over the last few years in driving penetration-led volume growth through its LUP strategy and multi-brand architecture.

"We believe HUL will likely have premiumisation led growth as it has already achieved high penetration for some of its products, and (material) growth going forward will be through upgrading consumer to a premium brand. HUL will also likely continue to gain penetration-led growth as consumer shift away from unorganised segment but we believe that benefit will be lower for HUL compared with Nestle India," ICICI Securities said. 

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Organic vs inorganic growth
ICICI Securities said Nestle is less dependent on inorganic success. 

"We believe inorganic growth comes with its risks while organic growth is less risky. Therefore, we prefer Nestle over HUL given the preference for organic growth," it said. 

At present, Nestle India operates in four categories out of seven categories where Nestle SA (parent company) is present. Therefore, it does not need to look for inorganic opportunities as it can
always get some of the brands from the parent to India as and when Nestle feels that there is opportunity in that particular category, ICICI Securities said. 

HUL is also largely present in the relevant categories where Unilever (parent company) is present. 
Also, HUL has been active in acquiring companies in India in categories like Health Food Drinks (GSK Consumer), ice creams (Aditya Milk), Ayurvedic Hair Oil (Indulekha) and Female Hygiene (VWash). 

Margin expansion
ICICI Securities said the potential for operating margins expansion is higher for Nestle India compared with HUL. 
This, it said, will be likely be driven by higher volume-led growth (penetration-led growth) leading to operating leverage and  premiumisation (launching of premium global brands). 

HUL has expanded its Ebitda margins by 550 bps and 950 bps in last five and ten years while Nestle has expanded its margins by just 310 bps and 220 bps over the same period. 

"We believe HUL was a beneficiary of both volume-led growth and premiumisation in the last decade which Nestle may witness in next few years. On the other hand, HUL expects margin expansion to be moderate in medium term given there will be increase in ad-spends and investment for market development activities," it said.

Competition
Nestle India is present in food categories while HUL is present in Home care, Beauty and Personal care (BPC) and Foods. 

"We believe Nestle has lower threat from D2C brands compared with HUL, that has a large presence in BPC," ICICI Securities said.