Despite business headwinds, FMCG stocks are likely to sustain high valuations
Whether the markets move up on the back of strong economic prospects and robust foreign flows, or remain volatile on account of global events like Eurozone worries and tensions in Korea, the fast moving consumer goods (FMCG) sector is expected to stand strong, despite its huge outperformance over the Sensex in the recent past. Since January 4, 2010, the BSE FMCG index has surged 28 per cent as against a 15 per cent rise in the broader markets.
Analysts reckon the stocks are likely to sustain their high valuation of an average 25 times 2011-12 estimated earnings (higher end of the five-year trading range). Given the defensive nature of the business, FMCG stocks usually outperform other sectors in volatile markets.
The sector has been witnessing strong volume growth of late. Moreover, pricing power has returned to companies (though with a lag for some players). But, intense competition and rising input costs challenge growth and profitability.
Analysts believe revenue growth for most companies may not be a problem due to strong gross domestic product (GDP) numbers and buoyant consumer sentiment. The same is unlikely to be materially impacted by the current level of food inflation. Also, any further significant margin compression is unlikely, as pricing power is returning and will continue to improve.
Given the rising consumer base and buoyant rural consumption growth, FMCG stocks provide strong earnings visibility and will continue to be in demand. As the Indian market gets more competitive, Dabur, Godrej Consumer Products and Marico are eyeing merger and acquisition opportunities in other emerging markets like Africa, Bangladesh and Sri Lanka, which is being taken positively by market experts.
Analysts are betting on companies with high growth potential, pricing power, less competition and/or the possible extent of diversification, both in terms of geography and products. In the largecap space, they prefer ITC, Asian Paints and Dabur India, while Marico, Jyothy Laboratories, Britannia and Emami remain the top midcap bets due to better valuation and growth potential.