Kotak Report Warns: Indian Consumer Stocks Dangerously Overvalued
Analysts warn that the market's reliance on "hope" for a turnaround cannot prop up these inflated prices forever, signalling significant downside risk for investors.
Valuations of most Indian consumer-facing companies — spanning both discretionary (like autos, paints, QSR) and staples (like FMCG) sectors — are unsustainable and fail all critical valuation tests, says a damning new report from Kotak Institutional Equities (KIE).
Analysts warn that the market's reliance on "hope" for a turnaround cannot prop up these inflated prices forever, signalling significant downside risk for investors.
Key Findings & Highlights:
The KIE report suggests that current stock multiples collapse under scrutiny.
“Indian consumer companies should logically trade at significantly lower
multiples compared with their current multiples based on (1) their likely earnings growth rates and cash flows and (2) a sensible cost of equity,” the report said.
Relative to History: Multiples remain near pre-pandemic levels despite significantly lower near-term and medium-term earnings growth prospects compared to the high-growth 2010s decade. Profitability and volume risks are also heightened due to intense competition.
Relative to Global Peers: Indian companies trade at massive premiums despite similar or lower near-term earnings growth and comparable 5-year historical growth in many categories. Examples include:
Alcobev: United Breweries (73X FY26E P/E) vs. Diageo (16X).
Paints: Asian Paints ...
Valuations of most Indian consumer-facing companies — spanning both discretionary (like autos, paints, QSR) and staples (like FMCG) sectors — are unsustainable and fail all critical valuation tests, says a damning new report from Kotak Institutional Equities (KIE).
Analysts warn that the market's reliance on "hope" for a turnaround cannot prop up these inflated prices forever, signalling significant downside risk for investors.
Key Findings & Highlights:
The KIE report suggests that current stock multiples collapse under scrutiny.
“Indian consumer companies should logically trade at significantly lower
multiples compared with their current multiples based on (1) their likely earnings growth rates and cash flows and (2) a sensible cost of equity,” the report said.
Relative to History: Multiples remain near pre-pandemic levels despite significantly lower near-term and medium-term earnings growth prospects compared to the high-growth 2010s decade. Profitability and volume risks are also heightened due to intense competition.
Relative to Global Peers: Indian companies trade at massive premiums despite similar or lower near-term earnings growth and comparable 5-year historical growth in many categories. Examples include:
Alcobev: United Breweries (73X FY26E P/E) vs. Diageo (16X).
Paints: Asian Paints (51X) vs. Sherwin-Williams (29X).
QSR: Devyani International (191X) vs. McDonald's (24X).
Staples: Nestle India (69X) vs. Nestle SA (19X), HUL (50X) vs. Unilever (17X).
Growth Reality Check
The report said that hopes for a return to high historical growth are misplaced. Near-term volume growth was stuck in low single digits; revenue growth is mid-single digits.
Medium-term growth is unlikely to exceed mid-single digits due to market fragmentation and intense competition.
Consensus earnings estimates have seen sharp downward revisions (e.g., Dabur India FY25 PAT estimates cut 26%, Jubilant Foodworks cut 65%).
While Indian staples outperformed global peers in growth over the past decade, this gap has narrowed significantly in the last 5 years. Discretionary growth has often lagged global peers.
Mounting Structural Risks
Kotak identifies severe threats to the traditional moats of incumbent brands:
Brand Dilution: Proliferation of new brands (including private labels from retailers like DMart and Reliance Retail) and forays by incumbents into adjacent categories (e.g., Grasim in paints, ITC in FMCG) erode pricing power and market share, especially in "low-association" categories like home care and packaged foods.
Distribution Disruption: The shift from General Trade (GT) to Modern Trade and Digital channels (e-commerce, quick commerce) diminishes the distribution advantage of incumbents. This is particularly acute for building materials (cement, cables) moving towards B2B sales.
Standardisation: Products are becoming harder to differentiate, especially in durables and home care, squeezing margins (e.g., paint sector margins fell sharply post Grasim entry).
Changing Consumer Behaviour: Health and environmental concerns pose long-term risks to categories like alcobev, tobacco, and products with heavy plastic packaging. Regulatory risks (e.g., state excise duties on alcohol) are ever-present.
Performance Warning
Despite high multiples, stock performance has been weak relative to global peers in the discretionary sector over the last 3 years. Kotak warns that if valuations correct to "rational" levels aligned with the new reality of lower growth and higher risks, the underperformance could worsen significantly.
The current valuations of Indian consumer stocks are fundamentally disconnected from their growth prospects and the escalating competitive and structural risks. The market's optimism for a cyclical recovery is deemed misplaced. The report implies a significant correction is inevitable unless growth dramatically surprises to the upside, which KIE views as highly unlikely. Investors are urged to exercise extreme caution.
Editor’s Note: This article was generated with the assistance of AI and reviewed by our editorial team for accuracy and clarity.
