May 17, 2013, 08.34 PM | Source: Moneycontrol.com
FMCG stocks have become extremely expensive after recent rallies. ICICI Direct advises to remain cautious about the sectors which is generally treated as defensive.
Sanjay Manyal (more)
Equity Research Analyst, ICICIdirect.com | Capital Expertise: Equity - Fundamental
“If you take the example of Hindustan Unilever Ltd (HUL) or Nestle , these stocks are trading at 35 times two year forward multiple, ITC is trading around 27-28 times two year forward multiple, which basically means it is discounting not only FY15 earnings, it is discounting FY16 or FY17 earnings also,” Manyal said.
ITC recently hit a life time high of Rs 355. The stock has rallied nearly 26 percent since April. HUL also hit a lifetime high of Rs 597 in may, the stock has gained 28 percent since April.
“So, we are increasingly becoming cautious about the entire FMCG space and ITC would be no different,” Manyal said.
ITC results were inline with ICICI Direct’s expectation. The company today posted 19 percent year-on-year increase in fourth quarter net profit at Rs 1,928 crore , helped especially by strong growth in the other FMCG and agri businesses. The company's net sales for the three-month period were up 19 percent from a year ago to Rs 8,180 crore.
Below is the verbatim transcript of Manyal’s interview.
Q: Prime facie what is your call looking at these numbers?
A: Prima facie it seems that numbers are in line in terms of profitability that has beaten our estimates from the sales front. So, prima facie it seems a good number. I think cigarette growth has to be around 2.5 percent kind of a volume growth that we were expecting. It seems it should be around that only.
Q: Have you had a chance to look at how the other fast moving consumer goods (FMCG), the hotels, papers etc perform?
A: No, I haven’t seen all the numbers in detail. So probably I require some time before commenting on that.
Q: What was the EBITDA margin number that you were working with?
A: We were working with 34 percent kind of EBITDA margin.
Q: It is 32.1 percent, so how would you react to that because topline has beaten estimate but profits are in line because of this drop in EBITDA margin?
A: What we understood is that the price increases, which company has taken last year in cigarettes would have compensated the margin and probably there would be some slowdown probably in the FMCG business part because it seems margins can go down in that segment only. Otherwise it looks good number from the earning front as well as on the sales front.
Q: We have seen a stock react with a gain of about 1 percent, what do you think the stock price is reacting to because as you said, even the margins have come in significantly lower than what you were expecting by about 200 bps, is it the topline growth, is there anything else in the numbers?
A: Yes, but on a topline it has beaten our estimates. So in the similar manner, in earnings front it seems a good number.
Q: What should the market be more focused about, be it on the net profit or the worry on the operating margin front because at this point in time, the initial reaction quite clearly seems to be a bit of a thumbs up because of the sales number?
A: ITC has gone up in last one month also but we are increasingly becoming cautious about the entire space of FMCG because on a valuation front, it is becoming expensive. Though sales and earnings front even this quarter numbers are pretty much in line with our estimates. I think valuation wise, this space is becoming increasingly expensive. Even if you take the example of Hindustan Unilever Ltd (HUL) or Nestle, these stocks are trading at 35 times two year forward multiple, ITC is trading around 27-28 times two year forward multiple, which basically means it is discounting not only FY15 earnings, it is discounting FY16 or FY17 earnings also. So, we are increasingly becoming cautious about the entire FMCG space and ITC would be no different.
Q: Based on the numbers that you have do you think there will be any kind of tweaking perhaps in your margins, in your revenues or perhaps in your EPS estimates for FY14 or FY15, would you need to rework based on what you have seen?
A: Right now, I do not think we will be changing our estimates because ultimately the numbers are in line with our estimates on our earnings front. So, we will be doing some tweaking but not major changes.
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