Consumption stocks are the most expensive as investors sniff revival in sector
Stocks of companies that operate in the consumer economy remain the most expensive as the Indian stock markets touch new highs.
Of the 10 most expensive stocks in the BSE 200 (the top 200 companies on BSE in terms of size and liquidity of the stock), five belong to companies focused on the consumer economy as investors continue to focus on a revival in domestic consumption.
The BSE FMCG (fast moving consumer goods) index is trading at 41.51 times expected earnings for 2017-18, compared to a 5-year average of 43.62 times.
The BSE consumer durables index and BSE consumer discretionary goods and services index are trading at 57.70 times and 35.80 times expected earnings for 2017-18 respectively.
In contrast, the benchmark 30-share Sensex is trading at 22.38 times 1-year forward earnings, higher than the 5-year average of 18.64 times.
Investors in stocks of consumer companies largely welcomed the rates under the unified goods and services tax that India will move to from 1 July.
Many consumer products will now cost less, although luxury products will cost more, forcing many companies to rethink their so-called premiumization strategy, where they were encouraging consumers to buy pricier alternatives of products they already use such as soaps and shampoos.
Analysts are unsure if consumption-focused stocks will continue their run.
“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,” said Dipen Shah, senior vice-president and head of private client group research, Kotak Securities Ltd.
The most expensive stock in BSE 200 is the Tata group’s Indian Hotels Co Ltd. which is trading at 59.83 times 1-year forward earnings—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 vice-president at Elara Capital Pvt. Ltd.
On 18 May, shares of Indian Hotels hit Rs145.65, their highest level since 9 January, 2008.The company is set to report its March-quarter earnings on 26 May.
The stock has legs, added Veera. “If one is looking at a three to five year horizon, I would still recommend a buy,” said Veera, who is one of the six analysts tracking the stock. All have a buy or outperform rating on the stock, according to data from Bloomberg.