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Massive Profitability in Expensive Indian Consumer Staples

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India Equity FVMR Snapshot – January 2017

*CE is Consensus estimates

Fundamentals

India’s 17CE* return on equity (ROE) is expected at 15.8%, well above the World at 12.6%. Consumer Staples is the most profitable sector by far, expected to deliver an ROE of 34.0% in 2017! The Telecom sector is facing headwinds with expectations of a 17CE* ROE of only 7.0%.

The dividend payout ratio (DPR) in India is below 30% vs. the World at above 40%. In 2017, only the Consumer Staples and Telecom sectors are expected to have a DPR that is above the World average at 41.6%.

Learn more about the world’s fastest growing economy, India

Valuation

India is trading slightly below the World on 17CE* 15.1x price-to-earnings (PE) but is more expensive on a 17CE* 2.4x price-to-book (PB). Energy and Health Care are the cheapest sectors in the country considering 17CE* multiples. In line with and extremely high ROE the Consumer Staples sector is trading at a very high 17CE* PB of almost 10x.

Looking at 17CE* ROE/PB India trades pretty much in line with the World, 6.6% vs 6.4%. Consumer Staples is the most expensive sector in India even when taking its high ROE into account, 17CE* ROE/PB at only 3.5%. The Energy sector offers the most ROE per unit of PB you pay, 9.1%.

Momentum

In 2017, EPS in India is expected to grow faster than the World, expectations at 19.1%. Earnings are expected to grow fastest in Materials followed by Consumer Discretionary and Financials. The contraction in earnings is expected to continue in 2017 in Telecoms.

Considering the PE-to-growth ratio (PEG) India looks attractive at a 17CE* PEG of 0.8 versus the World at 1.2. In general a PEG of below 1 (but above 0) is considered attractive and in India five sectors are trading at a 17CE* of below 1: Materials, Consumer Discretionary, Financials, Utilities, and Health Care.

Strong 1Y performance in Materials, up 33.3%, while Telecom and Health Care have performed poorly, losing 25.0% and 16.3% respectively. The Indian market underperformed the World by 14.0% in the past one year.

Risk

Gearing in India is substantially higher than the World. The highest gearing in India is found in Industrials, Telecom, and Utilities while the Info Tech sector is net cash.

India has been more volatile than the World in the past one year, a difference that has increased in the past three months. Lowest 3M volatility has been in the Energy sector, while Consumer Discretionary has been most volatile.

Read more: Analysts Remain Neutral on India

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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article.

Posted in FVMR Snapshot, India