INSUBCONTINENT EXCLUSIVE:
Amazon and Apple, with market capitalisation in excess of $1 trillion, already feature on the Wall Street hall of fame
On the other side of the globe, FMCG majors Hindustan Unilever (HUL), ITC or Nestle have also reached levels of valuation that, going by
conventional metrics, would be considered pretty exclusive.
It is no wonder, therefore, that Indian consumer staples have begun September on
a pretty weak note, with HUL, Nestle, Britannia, or Godrej Consumer losing as much as 10per cent in just about three days.
Before the
declines, the stocks were trading at 53-57 times FY20 projected earnings, while Amazon and Tencent are trading at 52 and 31 times based on
2019 earnings.
Indeed, Netflix is the only company among the global technology companies where the PE multiple is higher than those for
Indian consumer companies
The average P/E of Indian FMCG companies (excluding ITC) is 66per cent and 95per cent premium to FAANG and Chinese technology stocks.
The
distended valuation of FMCG stocks can be gauged from the fact that FMCG stocks are trading at three standard deviations from their 10-year
The expanded PE multiples suggest that stocks are pricing in earnings growth of 15-23per cent for the next ten years, much higher than
historically achieved in the most of the FMCG counters.
For instance, HUL would be required to grow its FCF at 22per cent CAGR over FY18-28
to justify the current stock price, according to CLSA.
The PE multiple re-rating has been the prime driver of stock performance for FMCG
firms as they have contributed nearly half of total returns in many cases
The FMCG sector valuation traded at 33 and 24 times five and ten years ago
The PE premium of FMCG companies compared with the Nifty has reached a record high level of 160per cent as compared with the 10-year average
of 110per cent.
There are couple of reason why FMCG stocks trade at dizzy valuations
First, FMCGs are considered safe and have drawn significant investor interest during periods of uncertainty
Second, with polls just a year way, the government has increased allocation to the farm sector, and FMCGs are direct beneficiaries of an
increase in rural consumption.
Third, there is acute investor focus on high corporate governance, healthy cash generation, and the domestic
Fourth, there is improvement in the growth profiles of companies after a few quarters of pain due to issues like demonetisation, and
inventory destocking before GST roll-out.
The latest declines show that the Street is gradually realising that such valuations are not
sustainable.
CLSA believes that there is an extend period of euphoria in staples
It said in a note released on September 3 that consumer staples in India have always been a structural story and hence, stocks always
command a premium, but the extent of PE expansion recently has probably surprised the most bullish of investors.
The reverse DCF analysis of
CLSA suggests that the 10-year implied growth rate in most cases is at a much higher pace than the past decade, and on a higher
base.
Similarly, Credit Suisse cut is weightage on consumer staples by 1.5per cent citing overvaluation.
