Valuationof FMCG cos defies demand slowdown

Written by fe Bureau | Mumbai | Updated: Aug 8 2014, 08:03am hrs
Despite a general gyration towards cyclical sectors and moderating domestic volume growth, most consumer goods companies continue to command rich valuations. Analysts believe that recovery-led hopes have supported buying interest in some of these stocks in the recent past with names like HUL, Dabur and Marico rallying anywhere between 19% and 25% in 2014. The 30-share Sensex has reported year-to-date gains of 21%. All these three stocks touched a new 52-week high this week.

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While the valuation base for the sector has moved up since 2012 as the pack outpaced the market with a huge margin, the visible deceleration in the volume growth in last one year has failed to affect the higher price multiples demanded by these stocks.

For the three months to June 2014, the domestic sales growth of leading consumer goods players were 10% to 60% below the average volume growth for the last four years. The general slowdown in the rural and urban demand, higher input costs and increasing advertising and promotional expenses in the wake of increased competition were some of the factors that attributed to demand moderation.

The slowdown was distinctly visible in the household and personal-care segment with companies like Colgate Palmolive reporting a 4% volume growth in the toothpest segment, lowest in many years.

HUL managed to outdo market expectations by reporting a 6% sales growth, a significant improvement from a decade-low growth of 3% in the previous quarter. However, the growth remained lower than ther 15-quarter average volume growth of 7.5%.

Defying these fundamental slowdown, these stocks are trading at a huge premium to their five-year average valuations as measured by the trailing twelve-month price-to-earnings multiple. On average, these companies are trading at 34.5 times their last one year earnings, which is nearly a 16% premium to their average valuations.

Analysts believe that while price hikes have helped many companies to withstand the general slowdown in demand, the price elasticity of demand may limit the upside earnings growth for these companies.

Meanwhile, Dabur continues to buck the trend benefiting from its diversified product portfolio that helped it clock a volume growth of 8.3% in the June quarter, in-line with its long-term average trand of 9% quarterly growth.