Why JPMorgan Thinks FMCG Valuations Will Remain Elevated Despite Slowdown
Valuations of India’s listed consumer goods makers are unlikely to decline even as their growth moderated amid a consumption slowdown in India, according to JPMorgan.
Slowing growth in the short term may be of some concern but valuations in India’s FMCG sector depend on medium- and long-term earnings expectations of investors, which remain intact, Latika Chopra, executive director at the global financial services firm, told BloombergQuint. “Unless there’s a further deceleration in growth, I don’t think valuation multiples are under risk for now.”
Volume growth eased for most FMCG firms in April-June 2019 as Indians are spending less on biscuits to shampoos. A BloombergQuint survey revealed that distributors now carry stock for 20-40 days, compared with 15 days till about four months ago and 10-12 days a year earlier. Another survey showed 5,000 FMCG distributors are out of business. Besides consumer goods volumes, vehicle demand is another indicator flashing red. That’s reflected in the GDP growth as the economy expanded at its slowest pace in six years in the quarter ended June.
Credit Suisse expects India’s FMCG firms to grow at the slowest pace in 15 years in the ongoing financial year. Still, there are a few companies that can grow faster than their past three-year average. Nestle India Ltd., Dabur Ltd. and Colgate-Palmolive (India) Ltd. are expected to stand out on market share gains, strong pace of product innovation and foraying into new categories, it said.
While JPMorgan revised its near-term outlook for the sector’s volume growth to “low- to mid-single digit” from “mid- to high-single digit”, it expects growth to revive in the next two to three quarters.
Most of the companies in the FMCG sector, Chopra said, have strong competitive advantages and are market leaders in the categories they operate in. These companies have strong aspirations to reach out to a larger population, she said, adding the success of marketing initiatives and product strategies is evident. Thus, investors are willing to look beyond short term while investing, she said.
Chopra also said the consumer goods makers may lower prices to pass on the benefit of lower input costs to customers to sustain volumes amid the slowdown. This, along with investments in product innovation and media spends, would keep expansion of operating margins in check, she said.
WATCH | JPMorgan’s Assessment of India’s Consumption Slowdown