Fast moving consumer goods (FMCG) stocks have not participated in the recent rally witnessed by the markets.
On Monday as well, these scrips underperformed the Sensex - falling by about 1.5 per cent as against Sensex losses of 0.42 per cent. 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, five to six per cent 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 per cent) and ITC (up 36 per cent) 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 per cent from current levels) and Rs 273 for ITC (gains of 6.6 per cent 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 per cent 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 (Rs 518.10) and ITC (Rs 255.75) are trading at peak valuations of 34 times and 28 times FY13 estimated earnings, respectively.