Dabur India’s results show why Indian FMCG valuations are crazier than some FANG stocks


Parag Parikh Long Term Equity Fund is a unique portfolio that has about 27% of its funds invested in global companies listed overseas. More than half of this is through positions in two FANG stocks—Alphabet and Facebook. When Parag Parikh’s fund managers are asked questions about the seemingly absurd valuations of FANG stocks, they simply point to the fact that the relation between Alphabet and Facebook’s valuations and earnings growth is far more sane than for some Indian stocks. FANG is an acronym for four popular technology stocks— Facebook, Amazon, Netflix and Google (now Alphabet).

A case in point is Indian FMCG (fast-moving consumer goods) stocks, where the gap between valuations and earnings growth is like the difference between the earth and the sky. Dabur India Ltd, for instance, reported earnings per share of Rs7.70 for the year till March 2018, up 6.1% from the previous year. Its shares meanwhile trade at Rs369, or 41 times estimated one-year forward earnings.

Note that profit grew by just 4% in FY17, and even if we were to blame some of this on shocks related to the goods and services tax and demonetization, the gap between valuations and earnings remains very high.

To be sure, some analysts will point out that all this is in the past, and that Dabur management’s commentary suggests a revival in rural demand, which will boost earnings growth. “We are witnessing early signs of revival in consumer sentiment, especially in rural India. Favourable monsoons and a likely stimulus by the government as part of its overall thrust on rural growth is expected to further boost rural demand,” the company said in a press release.

But as analysts at Kotak Institutional Equities say in a note to clients, “Isn’t the narrative great as always? Perhaps yes; however, if narrative is all that matters, is there ever a point in analyzing performance, even if only to test whether numbers are supporting the narrative? Restricting ourselves to the narrow lens of testing the narrative, we are not sure if Q4FY18 numbers reflect a decisive inflection in demand. The 7.7% domestic volume growth print, for example, could just reflect the low 2.4% base (of last year’s Q4).”

In any case, the Street has already been factoring in a healthy rebound in growth in the next couple of years, although even then growth rates aren’t expected to reach anywhere near where the company’s valuations are.

For long, it has been considered that a fair price-earnings ratio for a stock equals its growth rate, as Peter Lynch famously wrote in his book One Up on Wall Street. For some reason, investors in India’s FMCG stocks hold this principle very loosely, perhaps hoping that earnings will someday catch up with valuations.livemint