Rich valuation likely to cap further gains in Godrej Consumer stock

Godrej Consumer's shares have gained nearly 7% in the past one month

The recent rally in share of Godrej Consumer Products is likely to cap further gains in the stock even as new channels, product innovation and expansion of distribution network are expected to drive its business growth in coming quarters.

"Godrej Consumer's categories are less vulnerable on our slowdown vulnerability index. Whilst we like the fundamentals and strategy, the valuation arbitrage between Godrej Consumer and listed consumer companies in Africa, Latin America and Indonesia is very high. We remain neutral and wait for a better entry point," Nitin Mathur, analyst with Espirito Santo Securities, wrote in his note to clients today.

Godrej Consumer's share gained nearly 7% in the past one month. The stock touched a 52-week high of Rs 853.05 on the National Stock Exchange (NSE) on November 29, 2012.

"We roll over our fair value base to next year and so raise our fair value to Rs 657 from Rs 640. We remain positive on the stock, yet the recent run-up in the share price means we maintain our neutral rating," Mathur said.

While the company's top management in a recent meeting with analysts admitted that they worry about demand slowdown, they clarified that growth in volumes continues despite price hikes and high inflation.

Espirito Santo warned investors that slowing economic growth, negative real wage inflation and lack of employment opportunities pose threat to consumer goods companies' growth.

"Consumer stocks at current levels are priced to perfection and do not discount the brewing storm. We maintain our bearish stance on the consumer sector," it said.

At 10:23 AM, share of Godrej Consumer was traded at Rs 729.75 on NSE, down 0.9% from previous close.