Consumer goods scrips may've run up too fast

FMCG valuations not supported by growth, return on equity: Analysts

Widely owned consumer goods stocks might go out of favour this year, given their high valuations and stunted growth and return on equity (RoE).

Fund managers and analysts believe the expensive valuations, following a sharp run up in share prices in recent months of fast-moving consumer goods (FMCG) companies do not justify the volume growth numbers, which have more than halved in the past two years.

“Valuations are rich at this point. The earnings multiples at which the stocks are trading are much higher than the historic average. We have a cautious view on this sector,” said Gaurav Dua, head of research, Sharekhan.

Volume growth in the sector is around six per cent, down from 10-12 per cent a year before and 15-20 per cent two years earlier. Stock prices of these companies have been volatile in the past six months, in line with the underlying market. The BSE FMCG index, after spiking as much as 10 per cent, has remained mostly flat since July last year.

According to analysts, the price-earnings (P/E) multiples of some in the sector are way above their historic averages. Analysts believe the justifiable valuation for this sector, already higher compared to most others, should be up to 30 times its one-year forward earnings. However, some of large-cap companies, including Godrej Industries, Nestle India, Hindustan Unilever and ITC, trade between 31 and 45 times their earnings. A slowdown in the rural economy has also hit the sector. “From a practical standpointpoint, investors should stay away from this sector. There is not much room left for these stocks to rise further,” said Swapnil Pawar, chief investment officer, Karvy Capital.

“The good time for FMCG sector stocks is over, as the markets have realised that valuations such as these cannot be sustained at seven-eight per cent volume growth. There needs to be volume growth of upwards of 10 per cent before we see any substantial buying opportunity in these stocks,” said Niraj Kumar, head (equity investments), Aviva Life Insurance.

Certain brokerages expect consumer goods stocks to underperform the broader markets, as investors will take more risks when the economic outlook starts improving.

“The fundamental relative earnings outlook for consumer staples is also not looking as strong as last year,” said Pratik Gupta, managing director and head of equities, Deutsche Equities, in a recent interview.

The brokerage has an aggressive negative call on consumer staples.