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Safe turns risky

Consumer staples, long deemed to be 'safe', are at unreasonable valuations. Investors need to be cautious

Safe turns risky

Consumer-staples companies sell food, beverages, tobacco, alcohol and household products. Since these are consumed almost on a daily basis, the demand for these products is generally stable, irrespective of the economic environment. Hence, it is often said that these companies provide downside protection in a bad economic environment. However, presently, valuations of most of these companies are overheated, amidst slowing revenue growth.

The current P/Es of nine major consumer-staples companies are higher than their five-year median
P/Es. Their price-to-earnings-growth (PEG) ratios are also way above the reasonable mark of one. Many of these companies have taken several years to generate a CAGR of 12 per cent from their last P/E highs. Finally, in the last five years, the FMCG sector has shown average revenue growth of around 10.5 per cent, which is less than the nominal GDP growth rate of 11.77 per cent.

Safe turns risky

Safe turns risky

Safe turns risky