Broader market indices are not near their all time highs as yet. But a number of consumer stocks are quoting at all time high or near that. To illustrate the point, let us take a look at few of them below:
CMP as on 22/07/2011
Procter & Gamble Hygiene
Talwalkars Better Value Fitness
Source: Money control
The questions that arise in the mind of an investor then are –
- Are these stocks reaching a bubble territory or do they still have more steam left?
- If you have missed the bus, will an entry now make money?
- When will the valuation cycle reverse for these & other consumer stocks, if at all?
- If invested, should one exit these stocks at present moment?
No easy answers there and nobody can guess the precise moves of Mr Market. On top of that, how stock price behaves in the short term is guided by so many factors – volumes, technicals, sectoral triggers, liquidity besides stock-specific fundamentals. You would notice that these stocks are not capex intensive, command high capital return ratios and generally debt-free or low debt companies.
Having said that, I would say high point of valuation in consumer stocks would be marked by the following factors:
- Peaking interest rates: We are still some time away from the peak point in the interest rate cycle. RBI will continue the monetary tightening with at least a couple of interest rate hikes looming on the horizon. What remains to be, however, seen is whether the regulator goes ahead with straight hikes in the next few months or takes a pause in between or makes use of other monetary tools at their disposal.
- Pick-up in investment demand: Linked to interest rate cycle is the investment demand and its drivers in the domestic economy. We hear that credit offtake by Corporate India has slackened and may take a few quarters before the trend comes back.
- Next secular run in the market: You must be wondering why I have included this as a factor. Well, at the moment, it appears as if investors are chasing same few consumer stocks which are low on floating stock. But we can’t blame investors – they find safety in these domestic companies which are debt-free and FCF positive particularly when interest rates are high. Moreover, being domestic consumption themes, these are relatively insulated from global vagaries. This leads us to the next stage. So whenever we see the next secular run in the market, we’ll find liquidity chasing more number of large cap stocks; with the result that the scarcity premia for consumer stocks will ease out and their valuation likely to stabilize.
- Growth in earnings: As above developments roll out in next few months, the consumer stocks will be watched by the marketmen for their earnings coming as anticipated or falling short of market expectation. It is possible that a few consumer stocks involving discretionary spends could face greater pressure on earnings growth and valuation multiples might be dented in such a scenario.
- Brand power will stay: Most of them are strong brands, some with good MNC parentage which have traditionally traded at significant premium to the index and may therefore maintain their market position.
It will, therefore, be wrong to paint all of them with the same brush. Companies that have an established track record over last many decades are there to stay. For instance, Nestle India is going to complete 100 years in the country, that’s no small achievement. The company has excellent management, very high ROE, great brands, distribution network and backed by high quality business. Such a company will always trade at premium valuations. Can this multiple soften, well it can.
The bigger concern is for some of the less established consumer names (not necessarily from above list) where investors will do well to exercise caution and keep a tab on the earnings trajectory in the coming quarters.