Sectors such as automobiles, FMCG, jewellery, apparel, and electronics, typically, see a seasonal boost in sales during the festival season in India. Investors on their part, too, watch for potential gains in related stocks for short-term gains. This time around, though, analysts do not expect these stocks to deliver lucrative returns as most of them are factoring-in all the positives.
“Indian households spend across sectors like automobiles, consumer durables, and consumer staples during the festive season. Additionally, the wedding season boosts the jewellery, clothing, and catering sectors in the second half of any financial year. There may, however, be limited upside of about 5-10 per cent in select stocks, if any, as most positives are already priced-in,” said Deepak Jasani, head of retail research, HDFC Securities.
Valuations woes
Despite the seasonal kick, analysts don’t expect auto stocks to inch up much in the months ahead as passenger vehicle sales are facing a double whammy of high inventory levels and low demand.
Recent monthly sales data showed that sales of domestic passenger vehicles (PVs) fell around two-to-three per cent year-on-year (Y-o-Y) in August, to about 355,000 units, owing to low demand and reduced production by companies due to high unsold inventories.
This is the second consecutive month when PV sales have dropped. In July, PV sales were down 2.5 per cent Y-o-Y to 341,510 units.
The decline comes at a time when the sector is overheated on the bourses. The Nifty Auto index is trading at a price to earnings (P/E) multiple of 24 times at present. This is higher than its 5-year average of 22.4x, but lower than its 10-year average of 26.3x, data show.
By comparison, Nifty50 is trading at a P/E multiple of 21x, above its 5-year average and 10-year average of 19.3x and 20.7x, respectively.
Analysts, however, opine that the passenger vehicle segment could perform well if these inventories are cleared.
That apart, other segments such as Jewellery, clothing, and electronic appliances are also trading at rich valuations.
Individually, Kalyan Jewellers is trading at P/E valuation of 100.5x – higher than its two-year average of 51.6x. Similarly, Titan is trading at a P/E of 91.6x as against its two-year average of 84x. Senco Gold, too, is at a P/E multiple of 39.6 times relative to its three-year average of 27.8 times.
Ambareesh Baliga, an independent market analyst, said that though sectors like jewellery, electronics and apparels are trading at expensive valuations, these stocks might experience a “narrative” rally if the demand picks up during the festive season.
FMCG may offer value
According to analysts, increased rural consumption, better monsoon, higher budgetary allocation towards rural development in recent times, coupled with the festive season, may drive traction in the fast-moving consumer goods (FMCG) pack. The gains, however, will be limited, they added.
“FMCG stocks are trading at elevated valuations with the entire pack struggling with single digit volume growth. Long-term investors could avoid buying at these prices. Short-term traders, however, may consider adding stocks for a potential festive rally,” said G Chokkalingam, founder and head of research at Equinomics Research.
Investors, he added, may exit the stocks on rise and rebalance towards companies with strong sales growth prospects. He gave a ‘Buy’ rating for Nestle India amid better volume growth outlook, ‘Hold’ for ITC, and a ‘Sell’ rating for HUL.
The Nifty FMCG is trading at PE valuation of 41.6x times versus its 10 year average of 32.1x times.
Consumption, according to a report by Axis Securities, is set to be a key driver of the Indian economy in coming years. By 2030, India is projected to have 357 million young consumers under the age of 30, making it the largest youth consumer market globally,
Per the latest data from National Statistics Office (NSO), private final consumption expenditure (PFCE), an indicator of household consumption, surged to a seven-quarter high of 7.4 per cent in the April-June quarter of the current financial year (Q1FY25), up from 3.9 per cent in Q4FY24.
Against this, Baliga expects a sentiment-driven rally in ITC, HUL, Dabur, Jyothy Labs, and Emami.
First Published: Sep 03 2024 | 8:52 AM IST
