Quick look back at what worked in CY2017. Stocks in our sector coverage universe delivered a simple average (not market cap weighted) return of 57% in the past one year. The range of returns was wide - from negative 10% return for S H Kelkar to 171% for Titan. As many as nine stocks (38% of coverage universe) delivered returns in excess of 60%. Common threads - (1) bulk of the returns came from PE multiple expansion; while this was true across the sector, companies that also showed decent earnings delivery saw higher degree of multiple expansion, and (2) narratives trumped numbers for another year.
CY2017: a year where a random stock pick had a 1-in-3 chance of delivering 60%+
As many as nine of the 24 stocks we looked at for this exercise delivered returns in excess of 60% in the past one year. This included names like Titan (+171%), TGBL (+151%), JUBI (+115%), Page Industries (+84%), UNSP (+83%), HUVR (+70%) and Britannia (+65%) among others. The laggards (sub-30% returns!) included the likes of GSK Consumers (+28%), Dabur (+28%), Marico (+27%), Colgate (+19%), ITC (+15%), and JYL (+12%). S H Kelkar was the only stock with negative returns in the past one year.
PE rerating the key return driver as has been the case for the past few years
PE expansion has been the key driver of returns for the FMCG stocks for the past many years; CY2017 saw the same on an overdrive. Barring SHK that saw its 12-month forward PE decline in the past one year, the simple-average forward PE of the other 23 stocks as a composite increased to 45.2X from 32.8X at end-December 2016, an increase of just a shade below 40%. On a lighter note, 'FMCG PE' as an asset class would have delivered better returns than most asset classes around the world, in our view.
From a contribution standpoint, PE expansion contributed nearly 80% to the total returns generated as forward EPS growth (earnings rollover, essentially) averaged just around 12%. We must note that this 12% increase is versus forward EPS estimates 12 months back; this was the post-demonetization period and expectations were generally very benign. We also note that the 12% average reflects a wide range of as low as flat (for names like Emami and GSK-CH) to as high as 53% for Titan. In other words, earnings delivery for most of the names has actually been subpar in the past one year. Interestingly, the highest increase in forward EPS estimates is for names like Titan, PCJ, JUBI, UNSP, etc. We must note that these were the names the Street was generally fairly bearish on, in the post-demonetization period.
So, was there a theme of the year? Yes and no
From an earnings upgrade standpoint, the themes of the year were - (1) relatively subdued expectations going into the year - names like Titan, PCJ, UBBL, UNSP and JUBI benefitted from this. Earnings surprises were rewarded with relatively higher PE expansion thereby making these stocks stand out on the performance charts, (2) early beneficiaries of demonetization and GST, especially the jewelers who showed massive market share gains, (3) select situations where the Street's fears turned out to be overdone. GST-related margin impact on the alcobev players was a case in point; GST did not impact margins of UBBL and UNSP at all, and (4) select company-specific supernormal OPM expansion situations; HUVR and JUBI were cases in point. Partial retention of GST benefits was a common margin driver. From a multiple expansion standpoint, we believe the theme of the year was a more macro one - strong flows! Bullish 5, 10, 15 and even 30-year outlooks offered by companies enhanced the generally bullish sentiment further.