Why is Nifty FMCG Index trading at a high P/E ratio of 43.71?

18 May 2023 , 03:17 PM

Average P/E ratio of stocks making up the Nifty FMCG Index is currently 43.71.  Only the average P/E ratio of stocks making up the Nifty Consumer durables Index is higher than this, among all the sectoral indices at NSE. Their average P/E ratio is 57.42.

In terms of Price-to-Book value (P/B) ratio, FMCG stocks are the most expensive ones among all sectoral indices. They are currently trading at a P/B ratio of 12.28.

FMCG stocks are considered to be non-cyclical stocks. The demand for FMCG products does not vary much due to economic cycles. People continue to use FMCG products such as soaps even during economic slowdowns. So FMCG stocks are considered less risky. During times of economic uncertainty, the risk appetite of investors also goes down. They, therefore, prefer to park their money in less risky stocks such as FMCG stocks. This increases demand for these stocks among investors, in times of economic uncertainty, thereby driving their prices up.  This in turn may explain the high price-to-earnings (P/E) ratio at which these stocks are currently trading.  Some of the increase in prices of these stocks is also because of the better-than-expected March quarter results of many FMCG companies.

Nifty FMCG index is made up of top FMCG companies. These include ITC, HUL, Nestle, Britannia, United Spirits etc. In the past 1 year the index has given a price return of 25.15% and a total return of 27.84%.  Year-to-date in 2023, these stocks have given price return of 4.16% and total return of 4.31%. Broader Nifty 50 index has given a return of -0.19%, year-to-date in 2023. In the past one year it has given return of 11.84%. The FMCG index has outperformed the broader Nifty 50 index by a wide margin in this period.

Average Beta of companies in the index is 0.57. This shows that FMCG companies are less risky than the broader market in terms of volatility of their stock prices.

If one looks at the graph of the value of the index, the graph has become steeper in its rise since mid- 2020. This means that its value has risen much more after mid-2020. This, in spite of the fact, that rural consumption of FMCG goods slowed down because of Covid lockdowns and restrictions. This indicates that a large part of the demand for FMCG stocks, that has driven up their prices, has come up from investors taking recourse to them in times of high economic uncertainty.