The fast-moving consumer goods (FMCG) stocks are likely to face de-rating over the next 6-12 months as rising input costs and bond yields will hurt their profitability, according to analysts at Jefferies.
The FMCG stocks have been a shining star for about a decade now, driven by an uptick in consumption levels. The sector took a hit from demonetisation and the implementation of the goods and services tax (GST) but managed to get back on growth path towards the end of 2017.
Jefferies, however, believes the uptrend is coming to an end as the companies' profits are likely to be weighed down by higher raw material costs owing to weak rupee and surge in crude prices.
"We believe the up-cycle has played out and see limited scope for earning upgrades and PE (price to earning) re-rating in the context of rising input costs (crude and currency led) and bond yields," analysts Varun Lohchab and Tanmay Sharma wrote in a note on Tuesday.The brokerage expects de-rating over the next 6-12 months and remains cautious on the sector with select buys such as, ITC, Dabur, Nestle and Asian Paints.
Following are some of the key worries flagged by Jefferies:
Margin expansion levers limited now
Margins in the FMCG segment have seen an uptick in the past five years with sharp uptick, driven by cost efficiencies and GST-led savings.
"We believe margins have reached a point where further expansion would be detrimental in the long term, as under-investment and attracting higher competition could hurt growth," Jeferries note read.
Crude, currency and bond yields
The recent macro developments such as higher crude and bond yields, lower currency will impact the sector's earnings and valuations negatively.
"We adjust our EPS and PEs (price to earnings) across our coverage to reflect this and also roll over to Sep 20 EPS. Notable EPS cuts are about 5 percent for Asian Paints, about 3 percent for Godrej Consumer Products and about 6 percent for United Spirits."
Cautious view with select Buys
The brokerage sees risk-reward as unattractive in 'superior execution' names like Hindustan Unilever, Godrej Consumer Products and Britannia despite the recent correction of about 5-10 percent.
With regards to stocks such as Colgate-Palmolive (India), United Spirits, Emami and Marico, Jeferries' analysts said they "still remain less convinced on business turnaround".
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First Published: IST