Consumer sales growth has slowed over the past five years, but earnings growth remained healthy aided by benign raw material costs and reduction in indirect and direct tax burden, BNP has said
"In 2019, most consumer staples stocks underperformed the market with discretionary/ urban proxies faring better. Even then, most companies in our coverage continue to trade at a premium compared to their last 5/10-year average one year forward P/E," BNP Paribas said.
The global brokerage sees a risk to consensus earnings estimates as well as multiples. Hence, it downgraded Nestle India, Godrej Consumer Products and Titan Company to reduce (from hold); and Dabur, Emami and Jubilant Foodworks to hold (from buy).
FMCG sector was one of the underperformers in 2019 with the Nifty FMCG index falling 1.3 percent against the Nifty50 (up 12 percent) due to sharp correction in Emami, ITC, Godrej Consumer Products, Marico and United Spirits.
But the rally in HUL, Dabur, Colgate, Nestle India, Tata Global and Jubilant Foodworks limited the loss of FMCG index during the year.
"Most macro indicators that we track such as rural wage growth, consumer confidence and unemployment data have worsened in the past few quarters. Savings rate as well as nominal GDP growth rate have also declined," the brokerage said.
FMCG companies' operating margins, which have been improving consistently, could also be at risk from the recent inflationary trends in palm oil, LAB and agri commodities, according to UBS which calculated that telecom spending by consumers, which fell by $10 billion over FY16-19, could increase by $6-8 billion in FY21E, some of which could come at the cost of FMCG spending.
The risks to its negative view are a sharp recovery in rural growth and significant acceleration in government's direct benefit transfer schemes, the brokerage said.
Consumer sales growth has slowed over the past five years, but earnings growth remained healthy aided by benign raw material costs and reduction in indirect and direct tax burden, said the brokerage.
It viewed that high government expenditure and low consumer spending on telecom might have also supported sales.
In Q2 FY20, sales of companies under its coverage universe grew 5.4 percent YoY, lagging nominal GDP growth of 6.1 percent.
Unless the gross domestic product (GDP) growth recovers sharply, we see risks to Bloomberg consensus estimates as new headwinds like higher commodity prices, risks to government spending and telecom tariff hikes have emerged.
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