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Maruti, UltraTech, Motherson Sumi, and Gati now valued as consumer staples

The reason of giving consumption valuations to these cyclical companies is the stability of earnings growth they have demonstrated over the years.

Jul 31, 2014, 07.01 AM IST
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The reason of giving consumption valuations to these cyclical companies is the stability of earnings growth they have demonstrated over the years.
The reason of giving consumption valuations to these cyclical companies is the stability of earnings growth they have demonstrated over the years.
In the past one year, there has been a marked shift in the way fund managers and analysts are valuing companies in traditional cyclical sectors such as auto, auto ancillaries, cement and logistics as firms tweak their business models in line with the domestic consumption theme.

High earnings’ visibility, strong balance sheet, timely capacity expansion and huge acceptance of products have convinced experts to value companies such as Maruti Suzuki, Ultratech Cement, Motherson Sumi, and Gati as consumption companies. This means that price-toearnings multiple of these companies would expand and they would offer more value for potential investors.

“Investors have been moving towards consumer discretionary to play domestic consumption story, which so far focuses on consumer staples. Companies in auto, auto ancillary, cement and logistics are steadily catching eyes of investors to play next domestic consumption theme of India,” said Gopal Agrawal, chief investment officer at Mirae Asset. “If a company such as Maruti Suzuki continues to show consistent earnings growth in the coming quarters, then market would start assigning the company a price-to-earnings multiple of 23-24 times on a one-year forward basis compared with 17-18 times at present,” he said.

Maruti, UltraTech, Motherson Sumi, and Gati now valued as consumer staplesThat is because Maruti had stability of earnings even in times of slowdown. Once the car demand picks up, experts beleive that its earnings growth would be far superior to the present earnings growth. This is the prime reason a lot of brokerages are putting ‘Buy’ recommendations on Maruti despite the stock trading at a P/E of 18.5 on its oneyear forward earnings. They believe that this is not the peak valuation of the company and it has more scope for expansion. CLSA recently raised its target price on Maruti by ascribing a P/E of 19 times. This is higher than its 10-year average P/E of 15.2 times. There are three main reasons markets are giving consumption valuations to these cyclical stocks. One, these companies manufacture products meant for mass consumption with a reasonable element of brand equity to them. With income level moving up and rising urbanisation, sales volume of companies such as Maruti and Ultratech will sustain and may pick up.

Another factor that has convinced experts in giving consumption valuations to these cyclical companies is the stability of earnings growth they have demonstrated over the years. Take the case of Castrol. Till three year ago, it used to enjoy P/E in the range of 18-20 times. Despite a fall in sales volumes, it demonstrated stable earnings growth by introducing timely price hikes. This is one of the chief reasons the markets began considering the company as a proxy for FMCGs. Hence, its P/E expanded in the range of 28-30 times.

These cyclical companies are also demonstrating continuous improvement in their return ratios, in particular, RoE. “Investors are playing India building story through the cement companies, as they perceive cement will be used in building any asset used for mass usage. This is the reason P/E multiple of cement companies are re-rated,” said Giriraj Daga, research analyst with Nirmal Bang Institutional equities.

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Buy UltraTech Cement, target Rs 4,260: CK Narayan

Buy UltraTech Cement, target Rs 4,230: Chandan Taparia

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