Brokers wide off target as FMCG companies spring a surprise

MUMBAI: Stocks of most consumer companies have outperformed the BSE Sensex in the September quarter, compelling several institutional investors to review their 'Underweight' or 'Sell' stance on the sector.

For instance, shares of Britannia, Emami, Nestle and Godrej Consumers have rallied up to 38% during the quarter.

Besides, many consumer companies are trading at a premium to their average P/E multiple of the past five years, as smart investors are paying higher premium to consumer stocks for their earnings visibility, steady cash flows, higher return ratios, strong balance sheets, and relatively low government intervention, say analysts.

“We are ‘Neutral’ on FMCG space, though companies with MNC background have performed exceedingly well. Investors were attracted by FMCG companies as many of them enjoy higher return on assets (RoE), stronger cash flows, quality management, and better corporate governance,” said Sampath Reddy, chief investment officer at Bajaj Allianz. “In addition, investors have realised that a shift to the FMCG space is a better bet than cyclical stocks, as there is still some time away for the economic recovery to pick up.”

The BSE FMCG Index has risen nearly 14% in the past three months, outperforming the Sensex, which gained 4.8% during the same period. In the FMCG space, Britannia rallied the most during this period with gains of 38.8%, followed by Emami with 35.6% gains and Nestle with 25.3% gains.

“We have upgraded our stance on the FMCG space to ‘Marketweight’ from ‘Underweight’, as consumer sentiment has turned positive. With the festive season coming and monsoon only 12% below average, the demand is expected to remain buoyant,” said Nirakar Pradhan, chief investment officer, Future Generali.

FMCG companies such as Hindustan Unilever, Britannia and Godrej Consumers are trading at expensive valuations, as most of them have P/E multiple valuation of over 40 times based on trailing 12-months earnings.

Analysts expect improved consumption growth, easing input costs, and benign competition in the FMCG sector over the next 12 months, which is expected to boost revenue and margins.

“We believe that valuations of consumer companies are rich, and the risk-reward ratio is still not attractive. However, we are positively biased towards discretionary names like Jubilant Food and Titan, which are wellpositioned to benefit from recovery in urban demand, while among staples, we prefer ITC, Marico, and Britannia,” said Varun Lohchab, an analyst with CIMB.

Premium consumer products, which account for about 28% of the industry’s revenues, are expected see revival with rise in urban demand, thus aiding margins for FMCG companies.

The likely beneficiaries, according to analysts, will be companies operating in categories like personal care, detergents and biscuits.