Sunil Singhania-led Abakkus Asset management says that select quality shares are in a bubble zone, and could give zero or negative returns over the next few years.
Even as shares of FMCG giants HUL, Nestle continue to trade at peak valuation with very high PE ratios, stock market veteran Sunil Singhania-led Abakkus Asset management says that select quality shares are in a bubble zone, and could give zero or negative returns over the next few years. A study conducted by the firm revealed that a majority of the 27 high PE stocks have not delivered performance that justifies current valuations, and there can be little return expectations from these stocks going forward. Notably, the study includes prominent names such as HUL, Maruti Suzuki, Asian Paints, Nestle India, Titan Comapny, Dabur, Pidilite Industries, Siemens, Emami, VIP Industries, Bata India and Voltas.
Abakkus noted that majority of these shares have grown even below India’s nominal GDP since 2010, and would need to trade at 50-75x PE in FY28 for mere 12% annual return in the next 9 years. “Global peers of these firms have grown faster and have better capital efficiency and trade at 1/3rd of valuations. Further, reverse DCF shows that 30-40 years of consistent growth is required to merely affirm current peak valuations,” said the report.
Indian equity markets have never seen as high a valuation in a few stocks for such a prolonged period. We attempt to unearth and understand the valuation bubble in perceived quality stocks in India.
The Big Call – Bubble In Quality? https://t.co/VCuVxO4Yei via @AbakkusInvest
— Sunil Singhania (@SunilBSinghania) October 30, 2019
Taking the example of FMCG giant HUL, Abakkus said that the firm has recorded a 9% CAGR in revenues and 12% CAGR in profits in the last 9 years, while India’s nominal GDP growth in the period has been 13%. Further, the inflation in this period has been around 7%, so the firm has grown its revenues at 2%, net of inflation. “Even if HUL’s profits continues to grow at 12% CAGR till FY28, its PE in FY28 will have to be 55x for a mere share price return of 10% per annum, and 82x for an annual return of 15%. Notably, HUL currently has a trailing PE of 70x, s per the study.