Brokerage Credit Suisse has cut the weightage for consumer staple stocks in its model portfolio by 1.5 percentage points citing stretched valuations.
The last stock rally in the fast moving consumer goods stocks has taken valuations to an unprecedented territory when compared to own history, the Indian market and global consumer staples.
Hindustan Unilever Ltd., Britannia Industries Ltd., Godrej Consumer Products Ltd., and Dabur India Ltd. are now at three standard deviations above 10-year mean price-to-equity ratios, it added.
There is significant over-valuation in consumer staples at a time when consumption growth must fall to bridge the balance of payments deficit . Even as India's P/E premium to global/emerging market indices has broken through the last seven year's range, within the market staples are near a record premium to the index.Credit Suisse Report
As much as 64 percent of staples stocks are trading at two standard deviations above the mean P/E, and 91 percent of staples stocks are trading at more than one standard deviation away from their average P/E, according to the report.
These stocks in the recent past have had several tailwinds in the form of Goods and Services Tax rate cuts, boosting volumes and government adding into wages and pensions. But these trends are peaking as consumption is getting pressured by weaker rupee.
Who Moves Up In The Portfolio
Utilities--at a record discount to the market--as well as energy sector benefit from a weaker rupee got a thumbs up from the brokerage house. P/E multiples on Power Grid Corp. of India Ltd. and NTPC Ltd. have halved in the last eight years, noted the brokerage. Metals, and information technology sectors, too, will benefit due to a weaker rupee, it added.
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