Finally some sanity returning to FMCG stocks

Business

oi-Sunil

By Sunil Fernandes

Published: Saturday, July 27, 2013, 9:17 [IST]

After having seen a fast and furious rally in their share prices, FMCG stocks have given up some gains as investors have now started becoming more rational in their investment decisions.

It all began with ITC collapsing 4 per cent after its results on Thursday, wherein revenues failed to meet expectations. Though not strictly a FMCG stock, it can more or less be considered as one of the more defensive stocks, which had seen a rally in the last few weeks.

In line with ITC, Hindustan Unilever collapsed on Thursday and was down another 3.26 per cent again on Friday. Nestle, Colgate and the United Spirits all fell again on Friday.

HUL declared results on Friday and volumes disappointed the markets. The stock which had seen a run-up to Rs 725 on Wednesday dropped to Rs 662 by Friday, a good 8 per cent cut.

Hindustan Unilever has a price to multiple of around 40 times and price to book multiple of also 40 times. How can you accord a stock a price to book value of 40 times, no matter what business the company is engaged in. Clearly, HUL is quoting at an exorbitant price.

Ditto is the case with ITC where investors suddenly realised that the stock is richly valued at 35 times forward earnings.

The real problem for investors has been the dearth of opportunities to invest, because of poor economic conditions. They cannot touch banking nor infrastructure, nor metals nor real estate nor autos nor power. Where do they hide then? Of course, this has led to FMCG, pharma and software stocks as companies in the sector are at least growing. Hence, they started chasing these stocks making these stocks horribly expensive.

At least the drop in the share prices of ITC and HUL shows that some sense has begun prevailing among investors, who have stopped chasing stocks at any and every price.

GoodReturns.in