Consumer Stocks Trade At Hard To Digest Valuations
Analysts don’t expect an upside in consumer stocks, most of which have given double-digit returns this year and trade close to record valuations.
The Nifty FMCG Index, which has gained nearly 20 percent this year, is the best sectoral performer after the Nifty IT Index’s close to 35 percent surge.
In fact, valuations are two standard deviations — a measure of volatility —higher than the mean only the second time in history, Bloomberg data showed. Consensus target price of index constituents doesn’t suggest any upside.
One can estimate with a fair degree of precision the growth in free cash flow for a consumer company, said SBI Cap Securities’ head of institutional equities Nirav Sheth, who has the most bearish view on the consumer space. A consumer company, he said, can’t perpetually grow at 12 percent.
Here’s how individual stocks are valued based on their one-year forward price-to-earnings multiple.
Some of these stocks are trading at a significantly higher valuation compared to the 10-year average.
Most of the stocks on the index have a negative return potential according to their target price.
Behind The Strength
Broking firm CLSA acknowledges the rich valuations and lists the key reasons responsible for it:
- Indian consumer staple companies are the better way to play on the uncertainty going into an election year.
- These companies are direct beneficiaries of growth in rural markets.
- Continued focus of investors on high corporate governance, healthy cash generation, strong balance sheet and the domestic nature of business.
- Prospects of improvement in growth profiles of companies after a few quarters of pain due to issues like demonetisation, rural stress from the goods and services tax roll-out.
- India is better placed and possibly more immune to uncertainly in global markets.
- Higher visibility for earnings.