The consumer sector is among the few in the economy on which analysts and investors have pinned high hopes for a strong financial performance in the March quarter. And not without reason, given the low base of the post-demonetisation period and better macro environment compared to other industries.

Further, stocks of companies from this sector have been quoting at high valuations on hopes of demand revival in rural markets — a major factor for most FMCG (fast moving consumer goods) firms.

The good news is that most consumer companies justify their high valuations not only because of in-line or better-than-expected performance in the March quarter but also due to improved and robust outlook for FY19 according to management guidance and analysts.

Majority of consumer companies such as Asian Paints, Parag Milk Foods, Dabur India, Marico, Nestle, Zee Entertainment Enterprises, Titan Company, Sun TV and Hindustan Unilever, among others, have met analysts’ estimates on overall basis and reported strong financial performance.

Rural markets

Rural markets gradually coming out of stress and/or registering double-digit volume growth have helped FMCG companies. Further, recovery in rural demand on the back of normal monsoons will keep the momentum strong for the FMCG firms, say analysts.

For example, "Double-digit growth in sales volume during 4QFY18 has been encouraging and points to an improving rural economy. We continue to believe that GST implementation and rural recovery will be key catalysts for HUL’s outperformance," pointed out Antique Stock Broking.

"Increasing rural demand and expectation of normal monsoon will maintain the rich valuation," said Geojit in case of Asian Paints.

Advertising growth has been strong for media companies while demand has turned strong for companies such as Jubilant and Titan.

Very few companies such as Emami, Godrej Consumer Products and Kajaria Ceramics have disappointed the analysts.

However, investors need not despair, as the outlook is favourable for these companies.

HDFC Securities believes Emami will return to profitable growth with pick-up in rural demand (52 per cent of domestic revenues).

The management of Godrej has guided for domestic sales volume growth of 10-12 per cent in FY19, followed by improved revenue growth in Indonesia and Africa.

Suitable for long term

Despite slowdown in the real estate market, Kajaria Ceramics’ management has guided for double-digit revenue growth of 12-15 per cent in FY19, following market share gains post demonetisation and GST. Given the lofty valuations of most consumer companies, half of the above 16 companies have "hold" or "accumulate" ratings from analysts. Even though the remaining have "buy" recommendations, the upside potential is not huge.

The stock prices of Asian Paints, Nestle India and Sun TV have already crossed the target prices estimated by analysts. Very few companies such as Parag Milk Foods and Jubilant FoodWorks offer upside potential of more than 25 per cent.

The remaining 11 companies’ stocks offer upside of 3-17 per cent.

Though the consumer sector has always offered greater visibility, compared to other sectors, prospective investors should consider this sector at the current juncture only for the long term due to the high valuations.