CLSA warns Indian FMCG valuations exceed underlying growth prospects

CLSA said Indian Fast Moving Consumer Goods (FMCG) companies are among the most expensive in the world, based on their price to earnings (PE) ratio, against the backdrop of slowing growth and falling returns. The brokerage remained cautious on Hindustan Unilever and Marico and downgraded its ratings on Godrej Consumer to underperform.

"We remain cautious on FMCG multiples (valuations) in India, especially for the HPC (Home and Personal Care) companies, as we believe elevated multiples do not factor in risk to margins/returns due to increasing competition," said CLSA in a note to clients.

The estimated PE ratios of the country's top six FMCG companies, including Hindustan Unilever, Marico, Godrej Consumer, Dabur, Britannia and Tata Consumer, are above their averages for five, 10, 15 and 20 years, it said.

"Multiples have become increasingly detached from growth and even returns, which represents rising risk, especially as structural growth comes into question," said the brokerage.


Shares of domestic consumer companies have underperformed the market in the past five years on account of concerns over pricey valuations. The Nifty FMCG index has returned 88% in the five-year period, compared with the benchmark Nifty's surge of 157%.

"...Growth has decelerated, especially in the last two years, to a point where merely looking at the past five-year average is leading to a distorted baseline," said CLSA. "With structural changes in distribution and marketing, we believe it will be tougher to maintain the margin momentum seen post-GST and the Covid-19 disruptions."