In the last one year even as the BSE-500 index has given less than 3 three per cent return, there are more than a handful of stocks from the index that have doubled or even tripled.. Investors who had bet on stocks such as TTK Prestige, Jubilant Foodworks, VIP Industries, Bata India and Gitanjali Gems a year back are sitting on handsome gains now.
Notwithstanding increasing prices during the year, consumers spent heavily on items ranging from consumer electronics and kitchen appliances to branded diamond jewellery. This helped the robust growth for consumer companies and consequently, appreciation in their stocks. But what worries investors now is the high valuation of some of these stocks. TTK Prestige for instance is trading at 38 times and Jubilant Foodworks at 76 times their respective trailing twelve-month earnings. The price-earnings multiple of Shoppers Stop is 89 times (on consolidated earnings) while that of VIP Industries is 40 times. In contrast, the Sensex trades at a trailing PE of 20 times, down from 24 times at the start of the calendar.
Valuations of consumer stocks have run far ahead of the earnings growth and fresh exposures from here may have to be taken cautiously, feel analysts. Mr Sandip Sabharwal, CEO – Portfolio Management Services, Prabhudas Lilladher, says, “There is no justification for the valuation of a large number of the consumer stocks.
Investors are driven by fear and the urge to buy the outperformers of the immediate preceding period. These companies do not have the kind of growth required to justify 30-50x valuations. Most investors are scared of the macro environment and are trying to find refuge in these stocks. However it is unlikely that these stocks will outperform the broader markets over the next 2-3 years.”
The near term risks to performance for these companies stem from the tight liquidity scenario as well as the investment cycle which has got stalled due to a freeze in policy making, adds Mr Sabharwal.
Domestic institutions are already taking a cautious stance on consumer counters. Jubilant Food Works, VIP Industries and Shoppers Stop are some stocks that saw domestic institutional investors cut stake in the March 2011 quarter. In the current situation a contrarian approach to investment would help, says Mr Sabharwal.
“This is a good time to use the contra approach to buying stocks. While some of the fancied stocks in the FMCG sector are trading at price-to-earnings of 30 plus, a large majority of the market is trading at valuations of 5-10 times earnings.
“This is the right time to take a contrarian position by buying into such stocks and sectors with a view to hold on for at least 12-24 months. However, what investors need to be careful in evaluating is the reasons for the low valuations. There are companies with company specific issues whereas other stocks would be trading down due to a general apathy towards that sector.”