As the Sensex marches closer to its all-time high of 21,207 points, last seen in January 2008, several sectors are trading at an even higher price to earnings (P/E) multiple than what was in January 2008. In particular, frontline stocks in FMCG, IT and auto sectors are trading at high P/Es (see table). Some analysts say that such high P/Es are not sustainable and there has to be some correction going ahead unless earnings expand.
Foreign institutional investors have invested $17.3 billion in the Indian equity markets, pulling the Sensex up 15.6 per cent year to date, which has resulted in higher prices for these sectors. V K Sharma, head private broking and wealth management at HDFC Securities said, “If there is a deluge of liquidity, markets can defy conventional logic and demand a higher P/E Ratio.”
FMCG: Valuations stretched, ITC best
The sector has run up as investments surge in defensive sectors when the caution gauge rises. HUL touched its 10-year high of Rs 319.6 on Monday. “At over Rs 315, I would take money off the table in HUL,” Gaurang Shah, assistant vice-president at Geojit BNP Paribas Financial Services, said.
Analysts said the above average monsoon, especially in some parts of the north might keep agri-commodity prices on the higher end, further escalating the pricing pressure for the entire FMCG pack.
| FOUR QUARTER TRAILING P/E(x) | ||
| Auto | 11-Jan 2008 | 28-Sep 2010 |
| Tata Motors | 20.40 | 29.10 |
| Maruti Suzuki | 13.80 | 17.80 |
| M&M | 19.70 | 18.20 |
| Hero Honda | 15.30 | 16.60 |
| Ashok Ley | 14.50 | 18.10 |
| TVS Motors | 45.70 | 31.30 |
| FMCG | ||
| HUL | 25.80 | 31.10 |
| ITC | 28.10 | 32.20 |
| Britannia Ind | 22.50 | 50.80 |
| Dabur India | 32.40 | 42.10 |
| GSK Consum | 17.80 | 32.70 |
| Nestle India | 33.70 | 46.50 |
| Godrej Cons. | 28.80 | 35.80 |
| Colgate-Palmo | 27.50 | 27.60 |
| IT | ||
| Wipro | 23.40 | 22.50 |
| TCS | 21.60 | 30.50 |
| Infosys | 20.60 | 30.00 |
| HCL | 16.90 | 26.70 |
| Tech Mahindra | 16.80 | 13.30 |
| Rolta | 25.10 | 7.50 |
Motilal Oswal Financial Services has reduced the rating on FMCG, although the business outlook remains positive due to strong demand led by rural income and rising urbanisation. “Stocks have become expensive. We are reducing our weights on the sector due to valuations. ITC remains the top bet for us to play the sector,” Rajat Rajgarhia, Director of Research at Motilal Oswal said. Geojit's Shah likes ITC as it is a diversified play with many verticals – from cigarettes to hotels is better placed compared to HUL. Amongst other biggies, analysts like Nestle and are neutral on Dabur India and Colgate Palmolive.
IT: A stock-specific story
Although there is a divide over the possibility of a double dip recession in the West, most of the analysts remain positive on the IT sector. Bellwether Infosys is trading at a P/E of 30 as compared to 20.6 which was in January 2008. Indian IT companies are better placed now compared to their position in January 2008, on the back of business outlook according to Rajat Rajgarhia. “Infosys has surprised positively with its guidance in the past two quarters, expect FY12 to be another year of strong growth,” Rajgarhia said.
Gaurang Shah said, “Infosys is a good buy at Rs 2700-2750, since it gives a value proposition. TCS, HCL Technologies, Satyam, Tech Mahindra and Rolta India are better placed compared to other peers in terms of performance.”
Auto: In top gear
Analysts expect the auto sector to have a smooth ride, although the growth momentum may slow down. “Investors should stay invested in stocks such as Tata Motors, Maruti Suzuki and Mahindra & Mahindra as FIIs are not looking at any particular company when they invest in Nifty 50 com whether somebody likes Tata Motors or not, the stock will be bought," VK Sharma said. “We are seeing good demand whether it is commercial vehicles or passenger cars, and this will help these companies to continue growing their top line and bottom line," Neeraj Dewan, director, Quantum Securities said. Among two-wheelers,
Bajaj Auto is preferred to Hero Honda.
