Consumer stocks have been the most resilient in the current market meltdown
Their valuations of about 43 times forward earnings are far higher than the market’s 15 times
The Sensex and Nifty are down more than 20% from their peak, which means we’re officially in a bear market. It’s that time when investors typically grab their tin hats, crawl under the desk and wait for the carnage to stop. Some others go looking for safe havens—stocks that are expected to weather the storm.
So which have been the most resilient stocks in the Indian markets in the past month? Stocks of Asian Paints Ltd, Nestlé India Ltd, Hindustan Unilever Ltd (HUL) and Britannia Industries Ltd are among the handful in the Nifty to have fallen by less than 10% in the past month. As the chart alongside shows, among stocks that gave decent returns in the past three years, consumer stocks clearly stand out.
This is interesting as these are also among the most expensive stocks in the market. While the Nifty trades at about 15 times one-year forward earnings estimates, consumer stocks trade at about 43 times.
“When there are serious concerns about earnings elsewhere, investors are essentially saying we’ll take stocks with a healthy earnings and cash flow track record, regardless of valuations," says an analyst at a domestic institutional brokerage firm, requesting anonymity.
Of course, consumer stocks are also expected to gain from the sharp drop in crude oil prices, since crude and its derivatives form a large part of raw material and packaging costs. In the case of Asian Paints, analysts at Kotak Institutional Equities estimate a 150-200 basis points expansion in operating profit margin, translating to a 6-8% increase in earnings per share (EPS), on account of the drop in crude oil prices. Some of the benefits are estimated to be passed on to customers, which may well drive sales.
In the case of HUL, they estimate margin expansion of about 100-120 basis points, translating to a 5% increase in EPS. “We expect FMCG companies to largely retain benefits from the crude price fall," said the Kotak analysts in a note to clients.
To be sure, investors need to bear in mind that overall consumption demand remains poor, and the central bank’s consumer confidence survey suggests things are progressively getting worse. The spread of the novel coronavirus may not hit supply for these companies badly, as with some other industries, but its impact on demand cannot be ruled out.
But as the rich valuations of some of these stocks show, they are immune to such concerns. Also, note that not all consumer stocks are viewed the same by investors. Companies such as HUL and Nestlé India have managed to improve margins for years now, thanks to their ability to thwart competition. Investors seem to be betting that their market share gains and margin improvement will continue.
However, some other consumer stocks such as Marico Ltd, which are struggling for growth, have done relatively worse.