HSBC Analyses the FMCG Stocks in India after the dream run and execrpts as follows,
Most FMCG stocks have had a dream run, going up c25% y-t-d, outperforming the market by c20%. We believe stocks have run ahead of themselves and analyse factors which could justify current levels ie (1) PE multiple (2) EPS upgrades.
We study in detail FMCG PE multiples in relation to their own history and compared to the broader market. We conclude that current multiples are not justified (trading at 83 percentile) and therefore should contract, although they are likely to remain above historic average.
We believe that EPS upgrades are unlikely as (1) sales are unlikely to surprise on the upside: historic correlation with agri GDP is weakening and scant
incremental government support schemes (2) margins are unlikely to expand given high ad spends and competition coupled with some cost inflation. EPS upgrade cycle has come to an end, and moderate growth in mid-high teens is expected. Coupled with PE multiple contraction, stocks should remain range-bound.
We have GCPL [Godrej Consumers] as an Overweight, and that is our top pick as we believe that synergies and EPS accretion from acquisitions
have not been fully factored in by the street, and will offset weakness in the soaps business. We are Overweight on Nestle, as costs are expected to deflate in H2. From the other stocks we prefer ITC, which we downgrade to Neutral, but could see some more short-term upside (cigarettes volumes
to improve, FMCG business losses to reduce) and Asian Paints (good demand for paints).
