FMCG Stocks Valuation and Recommendation
We remain positive on the overall Indian FMCG space in the longer term due to the rising awareness for branded products. However in the short term, the space provides limited scope upside potential. We therefore have neutral rating on the sector.
Our top pick in the sector is ITC which provides a scope for re-rating from the current levels, in view of its dominance and resilience in the cigarettes division. We believe that the company is well placed to grow its cigarette EBIT by 21% during the next two years. We therefore recommend a BUY on the stock at the current levels.
We remain positive on Nestle in the medium to long term due its strong presence in low penetration categories like nutrition, instant foods and chocolates and confectionaries. However in the short term, the stock lacks triggers as the recovery in its business would be gradually spread over 12 month period. We therefore maintain our HOLD rating on the stock at the current levels.
In the liquor space, we believe that Radico Khaitan is a strong re-rating candidate with price hikes being implemented across states and the premiumisation initiative of the company. The company also witnessed an improvement in its cash flows during FY12. We recommend a BUY on the stock with a target price of INR158
FMCG Stocks: Summary of Recommendations |
||||||||||
Company |
Mcap |
Reco |
CMP |
Target |
Return (%) |
|
FY14e |
|||
|
(INRbn) |
|
|
|
|
EPS (INR) |
P/E (x) |
ROCE (%) |
||
ITC |
2,337 |
BUY |
297 |
322 |
9 |
11.8 |
25.2 |
49.9 |
||
HUL |
1,241 |
HOLD |
574 |
524 |
(9) |
17.5 |
32.9 |
65.5 |
||
Nestle |
458 |
HOLD |
4,766 |
4,495 |
(6) |
149.8 |
31.8 |
39.1 |
||
Colgate |
168 |
HOLD |
1,236 |
1,213 |
(2) |
48.5 |
25.5 |
125.9 |
||
Godrej |
230 |
HOLD |
674 |
625 |
(7) |
28.4 |
23.7 |
25.6 |
||
Dabur |
235 |
HOLD |
135 |
129 |
(4) |
5.4 |
25.2 |
29.8 |
||
Marico |
131 |
HOLD |
203 |
198 |
(2) |
8.6 |
23.5 |
20.5 |
||
Asian Paints |
373 |
HOLD |
3,885 |
3,799 |
(2) |
152.0 |
25.6 |
50.0 |
||
Radico |
16 |
BUY |
117 |
158 |
35 |
10.7 |
10.9 |
34.0 |
||
Auto Stocks Valuation and Recommendation
While current volumes/margins might not provide too much to cheer about, we believe that we are nearing the fag-end of the pain. Going into an easing rate cycle, we expect the auto companies with a higher sensitivity to an improving macro (cars/CVs) to witness a gradual uptick in volumes and consequently margins. This makes them strong re-rating candidates as well. Analysing the past few cycles, we can infer that even an indication of rates easing-off, re-rates multiples for the rate-sensitives, much before an actual uptick in volumes (which could be even 2-3 quarters away). This also makes us believe that directionally, defensives (2Ws) would underperform from here on.
Among the large caps, our pecking order remains Maruti Suzuki (multiple cycles turning its favour), Tata Motors (JLR’s product cycle in a sweet spot) and M&M (impeccable auto business; tractor downgrades behind us). Outside the front-liners, we like Eicher Motors, as we foresee a positive delta in volumes & margins for the cash cow, i.e. Royal Enfield. Furthermore, while playing a cyclical uptick in CVs, we prefer Eicher (VECV) to Ashok Leyland, given the cleaner business structure and superior return ratios.
For two-wheelers, while we maintain our positive bias for the superior business model (which is a boon in any environment), we believe that good businesses seem to get their due credit only in tough times. Between the two-wheeler biggies, while we prefer Bajaj Auto to Hero, staying true to our underlying theme, we would avoid the 2W pack for now. We downgrade Bajaj Auto to HOLD post the recent run-up in the stock and maintain our HOLD recommendation on Hero.
Among the ancillaries, we like Bosch as a structural play, but foresee a better entry point in the near-term. For Exide, while operating metrics are finally improving, our bull-case target price provides less upside. With risk-reward unfavourable at this level, we recommend a HOLD.
Auto Stocks: Summary of Recommendations |
|||||||||
Company |
Mcap |
Reco |
CMP |
Target |
Return (%) |
|
FY14e |
||
|
(INRbn) |
|
|
|
|
EPS (INR) |
P/E (x) |
ROCE (%) |
|
Maruti Suzuki |
394 |
BUY |
1,365 |
1,712 |
25 |
99.1 |
13.8 |
22.0 |
|
Tata Motors |
835 |
BUY |
262 |
324 |
24 |
47.0 |
5.6 |
31.3 |
|
Mahindra & Mahindra |
540 |
BUY |
825 |
925 |
12 |
63.2 |
10.3* |
30.1 |
|
Bajaj Auto |
507 |
HOLD |
1,752 |
1,856 |
6 |
133.6 |
13.1 |
60.5 |
|
Hero MotoCorp |
359 |
HOLD |
1,800 |
1,935 |
7 |
115.3 |
15.6 |
47.9 |
|
Eicher Motors |
60 |
BUY |
2,220 |
2,575 |
16 |
190.4 |
11.7 |
37.6 |
|
Bosch |
276 |
HOLD |
8,790 |
9,502 |
8 |
475.1 |
18.5 |
30.3 |
|
Ashok Leyland |
64 |
HOLD |
24 |
26 |
7 |
2.3 |
10.3 |
13.4 |
|
Exide Industries |
126 |
HOLD |
148 |
146 |
(1) |
9.1 |
15.2* |
26.8 |
|
Escorts |
7 |
HOLD |
68 |
66 |
(3) |
13.2 |
5.1 |
6.8 |
Best FMCG & Auto Stocks To Buy
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