Street's love for consumer stocks defies logic as growth slows: Kotak note

The valuations of most consumer stocks are quite outlandish and the Street's valuation logic is outdated in the context of the fundamentals (growth) of consumer companies.

Consumer stocks may be trading at eye-watering valuations — but the exuberance has little to do with fundamentals, warned Kotak Institutional Equities in its latest strategy report. The brokerage argued that the Street is clinging to outdated valuation logic even as earnings growth in the sector has sharply decelerated over the past five years. 

 

Despite muted stock performance across much of India’s consumption universe, analysts continue to assign rich valuation multiples, often benchmarked to historical averages. According to Kotak’s analysis, most large-cap consumer names are trading at 40–60x one-year forward earnings, significantly above what their current earnings profile can justify.

 

Street Target Prices Still Higher Than Market Prices

 

Surprisingly, consensus “fair values” for many of these stocks are still ahead of their current market prices, implying analysts believe the sector deserves even higher multiples. The report highlights several examples across staples, durables and discretionary categories. 

 

Kotak notes that these target prices are often built using 5–10 year historical averages of valuation multiples — a method the brokerage believes does not reflect the changed economic and competitive landscape.

 

 Asian Paints Highlights the Disconnect

 

To illustrate how stretched valuations have become, Kotak pointed to Asian Paints, one of the sector’s bellwethers.

 

Between FY2014–2019, Asian Paints delivered robust double-digit earnings growth, supported by low inflation and strong consumption demand.

 

But between FY2019–2025, earnings growth has materially slowed. Kotak’s exhibit shows a sharp deceleration in EPS CAGR compared to the previous decade.  

Most large-cap. consumption stocks are trading at expensive valuations

 

Despite this, the stock still trades at a high multiple, and consensus analyst targets remain even higher.

 

Kotak argued that for a stock to justify a 50x forward P/E, it must deliver consistently strong volume and price growth, which is no longer the case in the current macro environment. 

 

“Applying old-era valuation frameworks to new-era realities leads to unrealistic expectations,” the brokerage warned. 

 

Why Valuations Look Out of Sync With Reality

 

According to the report, the years between 2014 and 2019 benefitted from:

 

• Steady earnings growth
• Ultra-low global interest rates
• Abundant liquidity

 

This combination allowed consumer stocks to comfortably trade at premium valuations.

 

But the backdrop between 2019 and 2025 is drastically different:

• Earnings growth has slowed across staples, paints, food, and home care companies
• Input cost volatility has risen
• Competition has intensified
• High interest rates globally have increased the cost of capital
• Yet valuations remain in the old zone.

 

Street Still Expects More Upside

 

Kotak highlighted another surprising trend: consensus “fair values” for many of these companies remain above current market prices, implying that analysts expect even higher multiples in the future. 

 

Staples such as HUL, Nestlé India, Britannia, and Dabur — all of which have seen earnings growth soften — continue to receive lofty target prices based on 5–10 year historical average multiples, rather than forward-looking fundamentals.

 

Why This Disconnect Persists

 

Kotak attributed the sector’s valuation “stickiness” to three behavioural factors:

 

Anchoring bias: Analysts are reluctant to abandon long-followed valuation frameworks.

 

Overconfidence: Companies and analysts continue to provide precise long-term forecasts in a world defined by uncertainty — from climate change to technological disruption. 

 

Quarterly obsession: The market fixates on near-term earnings beats while ignoring deteriorating structural trends.

 

Many consumer stocks have delivered flat to negative three- and five-year returns, yet analyst ratings remain overwhelmingly positive. 

 

Kotak’s hypothetical valuation math shows that 40–60x P/E multiples can only be justified if companies deliver high and consistent long-term growth in both volumes and margins. With growth slowing and competition rising, this assumption appears increasingly unrealistic.

 

Higher interest rates also pose a challenge: US 10-year yields have stayed above 4%, pushing up global cost of capital and weakening the foundational case for premium multiples.

 

Kotak’s message is blunt: consumer sector valuations are no longer aligned with earnings fundamentals. 

 

“The Street seems to be onto something we are unable to fathom,” the report said— pointing to the persistent disconnect between growth realities and valuation optimism. 

 

For investors, the brokerage suggested approaching the sector with caution until earnings growth meaningfully accelerates or valuations moderate to more realistic levels. 

Disclosure: Entities controlled by the Kotak family have a significant holding in Business Standard Pvt Ltd