Like India consumer stocks? Their global peers are a lot cheaper
Indian consumer stocks that followed global peers on the way up have not seen a correction, as rich valuations on these stocks are being supported by management commentary about a rebound in rural consumption, according to Credit Suisse.business Updated: Mar 12, 2018 11:26 IST
Multinational consumer giants like Unilever Plc and Nestle SA typically trade at a discount to their Indian units, given the nation’s growth potential. They’ve become even cheaper after the selloff, prompting Credit Suisse to ask if stock values of their local subsidiaries will follow suit.
“Many large European and U.S. consumer staple stocks have fallen about 15% from their peak last year,” Arnab Mitra, an analyst at the brokerage, wrote in a note on Friday. “Indian consumer stocks that followed global peers on the way up have not seen a correction.”
For instance, Hindustan Unilever Ltd.’s valuation premium over its Anglo-Dutch parent is significantly above the 10-year mean, which wasn’t the case even three months ago, the analyst wrote. Unilever’s one-year forward price-to-earnings ratio has dropped 20% from its peak of 23 times, while its Indian subsidiary is valued at a multiple of 55.
Nestle India Ltd. trades at a trailing price-earnings ratio of 60.3 times, almost twice that of its Switzerland-based parent whose shares have tumbled 9% this year.
The rich valuations are being supported by management commentary about a rebound in rural consumption, Mitra said. This optimism could be cushioning the fall in valuations, for now, he said. Prime Minister Narendra Modi’s shock cash ban in late 2016 damped farm incomes, while the roll out of the nationwide sales tax in July disrupted supply chains.
“Given the valuation premium, it is critical for companies to at least meet their earnings expectations for Fiscal 2019,” Mitra wrote.