Consumer goods stocks most expensive in soaring market

Consumptionfocused stocks are among costliest in BSE 200

MUMBAI: Consumption-focused stocks continue to be the most expensive stocks as market hovers near record highs. Five of the top 10 most expensive stocks in the BSE 200 pack are consumption-focused, as investors focus on a revival in domestic consumption story, with investors already discounting a good monsoon to an extent.

BSE FMCG (fast moving consumer goods) index trades at 41.51 times 1-year forward earnings, compared to a 5-year average of 43.62 times.

BSE consumer durables index and BSE consumer discretionary goods & services index were trading at 57.70 times and 35.80 times 1-year forward earnings respectively.

In contrast, benchmark 30-share Sensex trades at 22.38 times 1-year forward earnings, higher than the 5-year average of 18.64 times.

“There are minor differences in the rates of consumer-focused products. There is not much of a change. There will be no major price action, which companies will have to take yup to set off impact from GST (The Goods & Services Tax),” said Dipen Shah, senior vice-president and head of private client group research, Kotak Securities Ltd.

Consumption-focused stocks, largely welcomed the rates under GST. Rates for most commonly used consumer goods like soap (bars), toothpaste, hair oil and others were fixed at the 18% slab versus the highest 28% tax slab. However, luxury items may face the brunt. FMCG companies’ attempts to move their consumers to more premium brands may be impacted by the decision to place pricier products in the highest GST slab of 28%.

Under GST, which takes effect on July 1, items of daily use such as tooth pastes and hair oils will be taxed at 18%, while products such as shampoos and hair creams, chocolates, and instant coffee will be taxed at 28%.

Analysts were unsure of these gains were here to stay.

“It is very difficult to say if there is more steam in the rally. I do agree that valuations are pricey, as the good monsoon is also partially priced in,” added Shah.

Indian Hotels Co Ltd. is the most expensive stock in the BSE 200 pack as it trades at 59.83 times 1-year forward earnings, which is still lower than its 5-year historical average of 61.11 times.

“The aspiration of Indians is changing. A cultural change is sweeping in. People are willing to spend more on luxurious venues, which has led to a rally in stocks such as Indian Hotels,” said Rahul Veera, assistant vicepresident at Elara Capital Pvt. Ltd. On May 18, Indian Hotels hit ₹145.65—its highest level since January 9, 2008.

“If one is looking at a 3-5 year horizon, I would still recommend a but on this stock,” said Veera, who is one of the six analysts tracking the stock. All these analysts have a buy or outperform rating on the stock, data from Bloomberg showed.

The other stocks in the pack are United Breweries Ltd, Asian Paints Ltd., Jubilant Foodworks Ltd and Berger Paints India Ltd.

United Breweries was the third-most expensive stock in the BSE 200 pack, but things are not looking very good for this liquor stock, which is as it is facing headwinds as the Supreme Court (SC) banned selling liquor along highways.

The stock trades 58.26 times 1-year forward earnings, lower than its 5-year average of 60.85 times. On May 18 , Kotak institutional Equities cut EPS (earnings per share) estimates on the stock by 12-17% to bake in March quarter earnings miss and SC ban impact. It retained the “sell” rating on the stock, and cut the target price to ₹650, from ₹680 earlier.

Paint companies have also had a good run—Asian Paints Ltd. and Berger Paints have run up 25.11% and 17.98%—outperforming benchmark Sensex which has gained 14.82% in the same period.

Asian Paints reported a consolidated profit after tax of ₹479.61 crore for the March quarter, up 10.1% from a year ago. Berger Paints will announce its earnings on May 30.

“There is marginal increase in tax rates for paint companies under GST. We expect prices will increase marginally but the listed companies will benefit due to the shift from the unorganized sector to an organized one,” said Sanjay Manyal, research analyst with ICICIdirect.com

“From the supply chain point of view , things become much easier with GST. This might lead to operational efficiencies and subsequently, cost savings,” added Manyal.