Unilever Indonesia de-rating underscores valuation risk to India FMCG

Currently, HUL trades at 58 times its estimated earnings for FY23. Nestle is the most expensive FMCG with 69x its FY23 P/E, while ITC is the cheapest at 17.5x

Fast moving consumer goods (FMCG) stocks in Indonesia have seen sharp de-rating in the past five years amid sluggish growth. Unilever Indonesia, the biggest consumer staples firm there, currently trades at 20 times one-year forward price-to-earnings (P/E) compared to 10-year average of 40 times.

While domestic FMCG companies don’t face challenges similar to their Indonesian peers, the sharp de-rating underscores the risk FMCG stocks face if growth expectations are not met.

“Indonesian staples stocks, which in the past have traded at similar valuations as Indian staples, are now trading at a large discount. Unilever Indonesia traded at a 25 per cent premium to Hindustan Unilever over 2011-16, which has now moved to a 66 per cent discount. This has raised investor concerns over risks to the rich valuations for Indian staples,” Credit Suisse has said in a note.

“The de-rating of Indonesia staples shows the importance of a threshold revenue growth of double digits to sustain rich valuations,” it added.

The de-rating in Indonesian FMCG stocks follows sharp deceleration in growth since 2013. India, on the other hand, has managed to grow at a healthy pace. Also, Indonesian firms such as Unilever have faced other headwinds such as market share and pressure on high margins. Add to that technical factors such as a drop index weightage due to change in methodology to free-float.

“India staples are expected to grow over 10 per cent during FY20-24 compared to mid-single digit growth projection for Indonesia staples. Unlike Indonesia, we expect larger companies in India to gain market share from smaller brands in categories such as home care, tea, hair oils and branded staples,” the Credit Suisse note says.

The domestic FMCG industry has consistently grown in low double digits during the pre-Covid era. Except during 2019, rural slowdown hit demand growth.

“The fundamental headroom for growth for FMCG categories in India is much higher than in Indonesia. India’s per capita income at $2,100 is half that of Indonesia at about $4,100, and many basic FMCG categories have per capita consumption much lower than in Indonesia,” the brokerage highlights.

Currently, HUL trades at 58 times its estimated earnings for FY23. Nestle is the most expensive of the pack with 69 times P/E (FY23), while ITC is the cheapest at 17.5 times.

Within India FMC, Credit Suisse is the most bullish on Godrej Consumer, Marico, Dabur and Tata Consumer, “which have multiple bottom-up drivers including entry into new categories and market share gains in core categories.”