FMCG 'overowned', rally likely to lose momentum
Shares of consumer goods makers may pause for breath as investors fret over potent combination of steep stock valuations.
By ET Bureau | Updated:
MUMBAI: Shares of consumer goods makers may pause for breath after outperforming benchmark indices in the past six months, as investors fret over the potent combination of steep stock valuations and profit margin pressures.
Portfolio managers said shares are unlikely to repeat their earlier performances for the rest of 2011 as the sector is ‘overowned’. “Most shares in the sector look expensive at this juncture after heavy purchases in the last few months that drove up stock prices,” said Sandip Sabharwal, CEO, portfolio management services of Mumbaibased brokerage Prabhudas Lilladher.
“There is no logic in buying a sector at valuations of 28 to 40 times price to earnings, when many others are at 10 times,” he said. Investors loaded up consumer goods shares in the past six months because they are considered safer when profits of most sectors have been squeezed by elevated input prices and higher interest rates.
Though the consumer goods sector have been affected by rising raw material costs, companies could hold back from raising product prices because of steady sales volume growth. But, companies may not be able to continue for long without price increased.
“Continuing high inflation could dampen demand and also hurt margins as there is limited scope of further cut in ad spend or decrease in other operating costs,” said Sanjay Singh and Pratik Biyani, analysts at Standard Chartered Securities, in a report. Analysts said premium stock valuations of consumer goods stocks leave very little room for earnings disappointments.
“At the beginning of CY11, we were positive on valuations. However, the recent outperformance leaves little on the table,” the Standard Chartered analysts said. Shares of top consumer goods makers have risen 5% to 20% since January compared to the 11.5% decline in the Nifty in the period.
The premium in consumer goods sector valuations over the benchmark Sensex has widened to 85% compared to the historical median of 53%, said Standard Chartered. “Part of the higher than-historical premium is justified given improving RoE of the FMCG sector as compared to declining return of the Sensex. However, it is not enough to justify the euphoric valuations,” the analysts said.
“We expect sector premiums to correct over the next 12-18 months with improvement in visibility of earnings of the broader market,” they said. Markus Rosgen, managing director and head of regional strategy, Citigroup, in a recent interview, said valuations of Asia’s consumer goods shares are expensive.
Portfolio managers said shares are unlikely to repeat their earlier performances for the rest of 2011 as the sector is ‘overowned’. “Most shares in the sector look expensive at this juncture after heavy purchases in the last few months that drove up stock prices,” said Sandip Sabharwal, CEO, portfolio management services of Mumbaibased brokerage Prabhudas Lilladher.
“There is no logic in buying a sector at valuations of 28 to 40 times price to earnings, when many others are at 10 times,” he said. Investors loaded up consumer goods shares in the past six months because they are considered safer when profits of most sectors have been squeezed by elevated input prices and higher interest rates.
Though the consumer goods sector have been affected by rising raw material costs, companies could hold back from raising product prices because of steady sales volume growth. But, companies may not be able to continue for long without price increased.
“Continuing high inflation could dampen demand and also hurt margins as there is limited scope of further cut in ad spend or decrease in other operating costs,” said Sanjay Singh and Pratik Biyani, analysts at Standard Chartered Securities, in a report. Analysts said premium stock valuations of consumer goods stocks leave very little room for earnings disappointments.
“At the beginning of CY11, we were positive on valuations. However, the recent outperformance leaves little on the table,” the Standard Chartered analysts said. Shares of top consumer goods makers have risen 5% to 20% since January compared to the 11.5% decline in the Nifty in the period.
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The premium in consumer goods sector valuations over the benchmark Sensex has widened to 85% compared to the historical median of 53%, said Standard Chartered. “Part of the higher than-historical premium is justified given improving RoE of the FMCG sector as compared to declining return of the Sensex. However, it is not enough to justify the euphoric valuations,” the analysts said.
“We expect sector premiums to correct over the next 12-18 months with improvement in visibility of earnings of the broader market,” they said. Markus Rosgen, managing director and head of regional strategy, Citigroup, in a recent interview, said valuations of Asia’s consumer goods shares are expensive.
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