India consumer story induces tizzy valuations

If you are an entrepreneur, you would want to sell goods and services that fellow Indians buy. If you are a private equity investor, you would want to be a part of this enterprise. If you are just an investor in the secondary market, you would want to buy into companies that make Indians buy.

No wonder then, your neighbourhood shop chains are making a beeline to ride the boom.

Punjab Crockery House (PCH) Holdings, Sai Silks (Kalamandir), a saree store chain, MT Educare, a coaching classes company and Jawed Habib Hair and Beauty are some companies that are looking to raise public money through an equity issue of shares.

[caption id=“attachment_72683” align=“alignleft” width=“380” caption=“New deal for Fabindia. Image courtesy Fabindia”]  [/caption]

A potential transaction of a privately owned company, Fabindia, with revenue of Rs 420 crore for the year ended March 2010-11 and a net profit of Rs 40 crore is attracting newspaper headlines. The report in The Economic Times highlights that leading private equity companies like Temasek, Carlyle, Everstone among others are making a beeline to take a pie of the fast growing ethnic retail company. The company is said to be looking to raise Rs 200 crore through an issue of new shares and sale of shares by an existing shareholder.

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An investment banker working on M&A transactions pointed out that in such a situation deals are struck at a multiple of 6 times to revenue and not just the net profit. This means Fabindia could get value of close to Rs 2,500 crore if the appetite is so strong.

To get a sense of the appetite, take a look at valuations of FMCG companies like ITC, Hindustan Unilever, Nestle or a retail company like Trent or Shoppers’ Stop. Share prices have these companies have clocked strong gains in an otherwise falling stock market.

The valuation of these companies is over two times that of the broader market. Price earnings multiple or the PE ratio of these companies based on expected earnings for March 2012 hovers around 25 when the broader market represented by the BSE Sensex trades at less 13 times.

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A Bank of America-Merrill Lynch survey on ownership of shareholding by foreign and domestic institutional investors suggest that the two classes of investors have raised their exposure to the Indian consumer sector.

It is important to understand that investors are looking at a ‘worst-case’ scenario of Indian GDP growth rate of 7 percent. It is also pointed out by experts that on the back of a robust monsoon, consumption demand in India is likely to remain strong.

On the other hand, the global picture is depressing to say the least when it comes to consumption.

Stephen Roach, a senior executive at US investment bank, pointed out in an article last Thursday that US consumer spending grew at 0.2% over the past 14 quarters - calculated in inflation-adjusted terms from the first quarter of 2008 to the second quarter of 2011. “Never before in the post-World War II era have American consumers been so weak for so long,” he observed.

A few days back, Titan Industries made a presentation to investors at a conference organised by securities firm Motilal Oswal. The company has 177 eyewear stores and plans to increase the same to 300 in another 2 years, long term plan includes increasing the number like some of the US eyewear retailers who have even 1,500 stores.

However, the company has no plans to open stores in any developed country.

No wonder then, the Indian consumer weighs on the investor mind.