Will Valuations Cap The Upside Of FMCG Companies?

A recovery in volume growth may not help the consumer goods stocks as they are still trading at a premium to their long-term averages.

The Nifty FMCG Index gained 12.7 percent this year, according to Bloomberg data. That compares with a 1.8 percent rise in the benchmark Nifty 50 Index.

Of the 10 fast-moving consumer goods companies with a market capitalisation of more than Rs 15,000 crore, eight trade at a valuation higher than their two-year and five-year averages. Only ITC Ltd. and Emami Ltd. are cheaper.

That’s why a consensus of analysts tracked by Bloomberg expect ITC and Emami to gain more than 20 percent this year. In comparison, they anticipate a 0-4 percent gain or even a downside from the current market level among peers.

“The economic momentum is slowing and unlike the slowdown earlier this decade, it’s driven by weak consumption,” Credit Suisse said in a recent report. The consumption remains overpriced with a risk of cuts in earnings per share, the broking firm, which remains ‘Underweight’ on the consumption sector, said.

India Infoline said gross margin for the sector remained stable despite crude-linked inflation. The demand inched up and is likely to remain steady, it said in a research note. But it cut earnings estimates on Godrej Consumer Products, Dabur and Emami in the range of 2-3 percent. The sector, it said, remains on the expensive side and is inclined only towards a handful of names, including ITC and GSK Consumer Healthcare.