High valuations take shine off consumption stocks
Consumption stocks seemed to have run out of steam with valuations becoming expensive following a sharp run up. Most counters, which had hit a 52-week high last month, have underperformed the benchmark indices in the last one month.
Shares of companies like Dabur India, Jubilant Foodworks and TTK Prestige have declined over 12 per cent against their monthly highs. Colgate Palmolive, Godrej Consumer, Hindustan Unilever, ITC, Marico and Titan Industries corrected between five per cent and nine per cent (see table). Interestingly, the fall in the Bombay Stock Exchange benchmark Sensex was less severe at 5.7 per cent.
Investors were playing the consumption stocks as growth sectors, and not as defensive stocks which led to a more-than-expected rally pushing up valuations, said analysts. However, with no positive surprise in the quarterly results, stocks corrected by as much as 12 per cent. Despite the southward movement, analysts believe the sector is still highly valued.
| LOSING GRIP | |||
| BSE price in Rs | 4-Aug 2011 | Fall from 1-month high (%) | 6-month returns (%) |
| TTK Prestige | 2,795.75 | -12.63 | 59.35 |
| Jubilant FoodWorks | 809.25 | -12.21 | 47.97 |
| Dabur India | 103.85 | -11.99 | 11.61 |
| Godrej Consumer Prod | 425.55 | -8.28 | 18.79 |
| Marico | 159.44 | -7.68 | 32.76 |
| Titan Ind | 222.95 | -6.42 | 24.01 |
| Hindustan Unilever | 319.25 | -6.21 | 18.81 |
| ITC | 200.00 | -5.37 | 25.55 |
| Colgate-Palmolive | 978.55 | -5.08 | 21.42 |
| Nestle India | 4,295.55 | -4.90 | 32.72 |
| Data compiled by BS Research Bureau | |||
Gautam Duggad, research analyst at Prabhudas Lilladher, said: “Valuations in the fast-moving-consumer-goods (FMCG) sector are quite expensive.”
Agrees Himani Singh, research analyst at Elara Capital: “There was no positive surprise from the quarterly results of the FMCG sector which could have helped the counters go further up. The growth was volume-driven but companies’ margins were under pressure.”
Brokerages have maintained a cautious view on the sector. For instance, Motilal Oswal Securities said inflationary pressure might impact volumes as well as profit margins of the companies. “Companies with low competitive pressures and broad product portfolios will be able to better withstand any slowdown in particular segment.”
In its latest monetary policy, the Reserve Bank of India (RBI) had also hinted that interest rate hikes may continue. This has further fuelled inflationary concerns. The central bank has hiked key policy rates for the eleventh time in the last 16 months. Angel Broking has revised its estimates downwards for some companies such as Dabur due to sluggish volume growth and pressure on gross margins, which could have a ripple effect on the company’s earnings.
During the quarter, prices of copra was up 96 per cent (y-o-y) while that of sunflower and rice bran oil were up 27 per cent and 25 per cent, respectively.
Going forward, analysts said that the FMCG sector is expected to see a mix of volume-driven and value-driven growth. But they did admit that any further upside movement is unlikely in the short to medium term.