FMCG index trades at lowest PE since 2011

March 31, 2020 5:01 AM

Even as a nationwide lockdown would severely impair demand for many sectors, FMCG may continue to record growth this year.

The BSE FMCG index is down 15% compared to the 30-share Sensex, which has fallen by 31.06% since the start of this year.The BSE FMCG index is down 15% compared to the 30-share Sensex, which has fallen by 31.06% since the start of this year.

By Urvashi Valecha

As markets try to assess the impact of the lockdown on the economy and companies, the fast moving consumer goods (FMCG) sector is proving to be a reasonably good place to hide. The FMCG index has outperformed the benchmark since January this year and, going forward, it appears that consumer staples will fare better than many other sectors.

The BSE FMCG index is down 15% compared to the 30-share Sensex, which has fallen by 31.06% since the start of this year. While some stocks have been beaten down more than others in the consumer space, from a valuation point of view this category of stocks is at their lowest valuation in FY11. The Nifty FMCG Index is trading at a trailing twelve months price/earnings multiple of 29.98 times. Over the last five years, price/earnings multiple of Nifty FMCG Index has ranged between 36 to 46 times. The last time it was at 30 times level was in fiscal 2011, says HDFC Securities.

According to Kaustubh Pawaskar, assistant vice president – research, Sharekhan by BNP Paribas, FMCG companies’ overall performance will be much better than the other sectors. “FMCG companies will feel the impact of Covid-19 in the first half of fiscal 2021 but the overall performance will be much better compared to other sectors as consumption for essential items and staples will sustain during the lockdown period,” he said.

At the current levels of 25,968.55, Nifty FMCG index is trading at a trailing price-earnings (PE) multiple of 29.98 times. According to HDFC Securities, the last time that Nifty FMCG index was trading at such valuations was in FY11. “The FMCG Index was trading at a premium compared to other indices, even in the ongoing slowdown, the large cap FMCG companies such as HUL, Nestle did not see a significant correction. Since the broader market indices have fallen from their current levels, the stocks which were trading at a significant premium have seen corrections. If the correction continues, these stocks will continue to trade at a discount from their peak multiples,” said Pawaskar. He added that the March-ending quarter of 2020 could see an increase in demand as people rush to stock up their supplies including staples.

Even as a nationwide lockdown would severely impair demand for many sectors, FMCG may continue to record growth this year. Nielsen points out to an increase in buying of consumer staples as well as health and hygiene products for February. The report stated that the traditional trade growth of branded pulses and packaged atta was 72% and 25% from mid-February to mid-March in 2020 compared to 2019. For the same period in 2019 compared to the previous year, the growth was 16% and 20%. Hand sanitizer sales have grown by 53% in February against 11% in the preceding three months. E-commerce companies have also seen an increase in average weekly orders between February and March this year, cooking oil witnessed a 106% growth and salty snacks have grown by 84%, among others.

Data show that Hindustan Unilever has witnessed a 24% correction from its highs. Nestle and Marico have seen a 28% and 42% correction, respectively, from the highs. Both Godrej Consumer and ITC have seen a 57% correction from their highs.

Kotak Institutional Equities has upgraded its ratings on Hindustan Unilever and Marico to ‘buy’. “Raw material (RM) environment has turned even more benign. We trim our FY21-22E estimates as we bake in Covid-19 impact on topline. RM tailwinds keep EPS cuts down to 2-4%. Upgrade to ‘BUY’ from ADD (FV `350),” said the brokerage with respect to Marico.

FMCG stocks have usually been a part of the defensives category as they tend to weather storms much better than many other sectors. Nirali Shah, senior research analyst, Samco Securities, said that investors could accumulate FMCG stocks. “The FMCG stocks right now are available at cheaper valuations than they were earlier.

This could be a good time to accumulate companies such as HUL because they are well managed businesses which have the ability to tide through this volatility and emerge out stronger. However, investors should be patient as it would take some time before returns start to show,” she said.

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