Time to sell consumer stocks?

As volumes and sales slow, market uncomfortable with stocks trading at a 40% premium to historical valuations

Analysts are finding it tough to justify the sky-high valuations of consumer stocks after the second quarter earnings, with revenues, profit and volume growth continuing to decline. FIIs have started paring their holdings in key consumers stocks. The BSE FMCG Index has fallen 7.3 per cent over the past month. Despite the correction in stock prices, Antique Stock Broking says valuations across consumer companies continue to be at the higher end of their historical trading band. Currently, the FMCG sector is trading at a one-year forward price/earnings multiple of 29x and stocks are trading at prices, which are trading at multiples that are higher than their five-year average.

The sell-off in consumer stocks has been coming for a while now, as it is difficult to justify sky-high valuations in an environment of slowing growth, though select segments such as paints and packaged foods have surprised the Street with their growth. Ever since the economic growth started plummeting two years ago, consumer companies have remained resilient. For instance, makers of paints companies and packaged foods have seen a healthy volume growth during the quarter. With expectations of greater political stability returning in 2014 and consequently higher growth, it may be a little risky to hold such expensive stocks.

During the second quarter, revenues of consumer goods companies have risen by a modest 10 per cent compared to the last year, against the 12 per cent growth in the first quarter and 15 per cent in the fourth quarter. Demand fell a lot more dramatically in the discretionary space. According to Kotak Institutional Equities, the strong expansion in gross margins on a weighted-average basis was largely aided by a benign raw material index. However, operating margins expanded less than 50 basis points, as most of the gains at the gross margin level were eroded by significantly higher advertising and promotion spends. Analysts believe the rupee's impact is not being fully reflected in the margins yet. They feel in time, this will hurt companies.