Fast moving consumer goods (FMCG) stocks have not participated in the recent rally witnessed by the markets. Since September 6 closing, the Sensex is up 7.7%, but HUL is down 1.3% and ITC 1.9%. On Monday as well, these scrips underperformed the Sensex - falling by about 1.5% as against Sensex losses of 0.42%.
This is largely due to investors switching from defensives to cyclicals post the announcement of reforms last week, which has raised hopes of an economic revival and consequently in core sectors including Infrastructure, Power, Banking, etc. Experts believe if the reforms momentum continues, this trend of underperformance by FMCG stocks may also continue.
Abneesh Roy, analyst at Edelweiss Securities says, " With good growth-oriented reforms announced last week, we are witnessing sector rotation happening towards the ignored sectors. Incrementally, cyclicals will get more money. FMCG stocks are expensive when compared to their historical averages. Though we believe, 5-6% correction is not significant, but if reforms continue scrips such as ITC, HUL could see more correction. We remain positive on the entire FMCG space due to strong fundamentals.
FMCG companies' margins and volumes have also remained stable so far, but Price/Earnings multiples remain quite expensive. We advise investors to buy on dips in such scrips. We have a target price of Rs 290 on ITC and Rs 560 on HUL over the next one year."
Interestingly, both HUL (up 59%) and ITC (up 36%) have given robust returns in the past one year, making them a favourite with investors. Analysts believe, the recent fall is also partly driven by some profit booking in these scrips. As per Bloomberg data, brokerages are expecting muted performance by both these scrips on a one year horizon. The average target price for HUL is Rs 478 (downside of 7.6% from current levels) and Rs 273 for ITC (gains of 6.6% from current levels).
Says V Srinivasan,analyst at Angel Broking, "The market mood has become buoyant and smart money is going to high growth sectors such as Infrastructure, Capital Goods, etc. FMCG stocks have outperformed the markets in the past one and a half years. HUL, ITC scrips could fall by 5-10% from current levels. The upcoming results season will be key as any slowdown in consumption demand will hit these stocks further. We have a neutral view on both ITC and HUL scrips as they appear to be fairly valued."
At current prices, HUL and ITC are trading at peak valuations of 34 times and 28 times FY13 estimated earnings, respectively.