12 July, 2014 07:07 IST
HDFC Sec underweight on FMCG on moderation in demand, rich valuations
Source: IRIS (24-DEC-12)
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HDFC Securities recommend investors to go Underweight on the Indian consumer sector'We are getting cautious around current demand growth and relatively rich valuations, especially for FMCG stocks.'

Barring ITC, most consumer companies witnessed moderation in volume growth in 2QFY13. The slowdown was not only experienced by companies that derive most of their revenues from discretionary categories (Asian Paints, Nestle, Britannia, Jubilant Foodworks, TTK Prestige) but also by companies with high contribution from staples (HUL, GCPL, Marico, Emami, Dabur).

'With the FY13 festive season spilling into Q3FY13, we think the quarter assumes greater significance than normal,' the stock broker said.

While commenting on Underweight stance, HDFC Securities said, 'A steady drumbeat of negative news - sustained inflation, GDP slowdown, weak rupee, reduction in disposable income and consumers’ perception about their economic situation turning negative, threatens FMCG valuations. The FMCG pack is trading at a 20% premium to its 5-year mean valuation (100% premium to NIFTY) and therefore looks vulnerable to us in near term. With imminent rate cuts, investors might switch to rate cyclicals from defensives.'

'Still, not all companies will be equally impacted. We like companies with diversified product portfolios, focus on innovations, and strong distribution reach,' it added. 

However, HDFC Securities is positive on the long term growth prospects of the FMCG sector. It
recommends Buy on ITC and Godrej Consumer, Outperform on Emami, Dabur, Marico and HUL and Underperform on Asian Paints, Nestle, Colgate and GSK Consumer.

Disclaimer: IRIS has taken due care and caution in compilation of data for its web site. Information has been obtained by IRIS from sources which it considers reliable. However, IRIS does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. IRIS especially states that it has no financial liability whatsoever to any user on account of the use of information provided on its website.

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