Fast-moving consumer goods (FMCG) stocks, which have seen a rise of over 30 per cent this year, have more steam left to continue the rally, say analysts.
Leading foreign brokerage Credit Suisse, which has initiated a coverage on the consumer staple companies, believes even though the price-to-earnings multiples are high for FMCG stocks, these are still quite far from their peak.
“We expect its (FMCG stocks’) rich valuations to sustain, as most leading companies will likely deliver 15-25 per cent earnings CAGR (compounded annual growth rate) over FY12-15, while maintaining high capital efficiencies,” the brokerage said in a report.
The BSE FMCG index has gained more than 30 per cent since January, outperforming the benchmark Sensex, which has gained about 15 per cent. The FMCG index has outperformed the Indian market for the past two years. Due to the outperformance, FMCG stocks command a premium not just to the overall market but to its peers globally.
Expensive valuations raise concerns in the minds of investors, who look at buying into these stocks. But Credit Suisse analysts — Arnab Mitra and Akshay Saxena — believe there is still scope for more valuation upside from current levels.
“The sector has always traded at a premium to the overall market due to the high free cash flow generating business models which commands very high ROEs (return on equity) and high standards of corporate governance demonstrated by managements of most companies in the sector,” the analyst duo said in the report.
“We do not see a case for de-rating of the Indian FMCG stocks from their current valuations. We expect earnings growth trajectory to be maintained, ROE to improve further from current high levels, balance sheet leverage to further come down and high levels of corporate governance to continue. There could be earnings upsides if commodity costs stabilise from hereon after the sharp increases in the past two years,” they added.
Credit Suisse has an 'outperform' rating on ITC Ltd, Godrej Consumer Products Ltd, Emami Ltd, GlaxoSmithKline Consumer Healthcare Ltd, Marico Ltd and Hindustan Unilever Ltd, while it has a ‘neutral’ rating on Nestle India Ltd and ‘underperform’ on Dabur India Ltd and Colgate-Palmolive (India) Ltd.
According to Credit Suisse, these companies have ‘invested in brand innovation and augmented their distribution and supply chains’ over the past three-four years, and these will have a positive bearing on their performance in the next two-three years.
The brokerage says companies with leading brands are likely to benefit the most as they will have high margin resilience and scope for margin expansion.