Expensive FMCG stocks off highs as consumption cools in rural India

Valuations of FMCG stocks have finally started correcting, with prices falling between 3 per cent and 12 per cent in the past one month as compared with the marginally positive returns on the Nifty.

On an average, shares of FMCG companies are currently trading 15 per cent below their yearly highs as foreign portfolio investors reduced their positions on the sector, citing expensive valuations.

According to analysts, earnings outperformance is critical for maintaining premium valuations. However, contrary to Street expectations, demand recovery is rather slow and is likely to take another 2-3 quarters, as per management commentary across FMCG companies.


Stocks such as Godrej Consumer, Gillette India, ITC, Marico, Colgate-Palmolive, Bajaj Consumer, Hindustan Unilever and Glaxosmithkline Consumers have declined between 5 per cent and 12 per cent in the past one month. Nifty FMCG index has shed nearly 4 per cent in this period. Nifty 50 has gone up marginally, 0.07 per cent.

“With margin expansion likely to be at a slower pace, it is critical for the FMCG companies to drive top-line growth to match Street expectation of sustained, healthy, and double-digit earnings growth,” said Nitin Gupta, analyst, SBICAP Securities.

“Another factor safeguarding the premium sector valuations despite the recent slowdown is the TINA (There Is No Alternative) effect. Given the current steep valuations, FPIs have continued to trim their positions in the sector,” he added.

Colgate, Britannia, Dabur, Godrej Consumer and Marico are currently trading about 40 times their FY21 estimated earnings, while HUL and Nestle are trading at PEs of 51 and 59 times.

The sector is considered defensive, which means FMCG are in high demand in falling markets. The sector is struggling to boost growth. Stocks such as Godrej Consumer, Dabur, Marico, Emami and Bajaj Consumer have seen earnings downgrades in the past one month.

“With macroeconomic headwinds worsening, demand and consumer sentiments have aggravated sequentially. This, coupled with liquidity challenges, exerted pressure on the trade pipeline inventory,” said Abneesh Roy, analyst, Edelweiss Securities. “This, we believe, would lead to the softest volume growth in Q2FY20, a nine-quarter low.”

Stocks such as ITC, Gillette, and Godrej Consumer are currently trading 20 per cent below their respective 52-week highs. Britannia and Marico are down by 15 per cent, while Hindustan Unilever, Dabur, GalxoSmithkline Consumer have declined over 6 per cent from their yearly highs.

However, some analysts believe that the current slowdown is not structural and is likely to see a rebound in the medium term as the effect of central government initiatives matures.