Street Turns Bullish on Consumer Stocks Even as Kotak Warns of High Valuations

Street Turns Bullish on Consumer Stocks, But Kotak Flags ‘Sour’ Valuations Amid Weak Fundamentals

Even as broader markets stage a relief rally across several sectors, consumer stocks remain under pressure in 2025, failing to mirror the bounce seen in other pockets of the market. Despite supportive government measures including revised income tax slabs and Goods and Services Tax (GST) rationalisation aimed at reviving consumption, FMCG and consumer names continue to trade in the red. This divergence has prompted a sharp difference in opinion between bullish Street sentiment and a stern warning from Kotak Institutional Equities.

In a detailed note, Kotak Institutional Equities’ Sanjeev Prasad said the current valuation logic applied to consumer stocks is “outdated” given the shift in fundamentals over the past several years. He termed the prevailing valuations “outlandish,” questioning the optimistic assumptions analysts are using to justify lofty price targets.

Consumer Valuations Seen as Detached From Reality, Says Kotak

Prasad noted that while consensus estimates suggest fair value for many FMCG stocks is higher than their current market prices, this perception is anchored in valuation multiples that have little relevance in today’s market environment. According to him, analysts appear to be relying on “high target multiples” derived from historical averages of the past five to ten years.

“We would not mind some of the valuation-expanding rationale the Street appears to be consuming,” Prasad said, highlighting the disconnect between analyst optimism and ground reality.

Kotak believes that using past performance as a valuation benchmark is “bereft of logic,” especially when future earnings growth is expected to be significantly lower than the strong growth achieved in the 2010s. For several years now, consumer companies have reported sluggish revenue trends and margin pressures, making their steep 40x–60x price-to-earnings (P/E) valuations difficult to justify.

Also Read : M&M Emerges as Top Nifty Gainer as Brokerages Back Its Ambitious Growth Targets

Street’s Fair Value Estimates Still Outpace Current Prices

Despite the recent underperformance, consensus projections show that fair values for many consumer stocks continue to trade above their current market prices. Analysts, therefore, continue to argue for upside even when earnings growth remains muted.

For example:

• Whirlpool carries a fair value 22% above its CMP,

• ITC at 22% higher,

• HUL at 16%,

• Godrej Consumer Products at 17%,

• Crompton at a steep 35% premium to CMP.

This trend suggests that analysts, knowingly or unknowingly, are baking in aggressive forward assumptions that may not align with evolving industry fundamentals.

The Rerating Phase Is Over, But Investors Still Price in Old Narratives

Kotak highlighted that the major rerating for FMCG stocks occurred between FY2011 and FY2020, when companies enjoyed consistent earnings growth and benefitted from a lower global cost of equity. During that period, the sector delivered steady returns, gaining strong investor loyalty that persists to this day.

However, the past three to five years tell a different story. Many consumer stocks have posted negative or stagnating returns across one-year, three-year, and five-year periods:

• Whirlpool: -34% (1-year), -7% (3-year), -10% (5-year)

• Crompton: -29%, -9%, -2%

• Page Industries: -11%, -5%, +12%

• Dabur India: +2%, -1%, +1%

• HUL: -1%, -1%, +3%

• Asian Paints: +17%, -2%, +6%

• Polycab, one of the few outliers, shows strong gains: +19%, +45%, +52%

These numbers underline that the sector has struggled to deliver meaningful returns, yet analysts remain optimistic, expecting a revival similar to the growth cycle of the previous decade.

Kotak Warns Street Is Ignoring Structural Changes in Consumer Sector

Kotak’s analysis argues that the Street has “missed the fundamental changes” in business models of consumer companies. The brokerage said many companies and analysts cling to the belief that earnings growth will bounce back to the levels witnessed between FY2011–20, despite evidence of structural slowdowns.

The note highlighted three reasons for this recurring mismatch between fundamentals and valuations:

1. Persistent Reliance on Quarterly Forecasting

Analysts remain overly focused on short-term quarterly estimates, even though companies have delivered stagnant performance for years. This leads to inflated expectations that rarely materialise.

2. Deep-Rooted Cognitive Biases

Investors continue to view consumer stocks as “safe bets,” anchored in historical experience rather than current realities. This behavioural bias has resulted in unrealistic target multiples.

3. Overconfidence Among Companies and Analysts

Kotak says many companies remain overly confident in their ability to forecast demand—despite disruptions such as climate risks, tech-driven competition, and shifting rural consumption patterns. Analysts, in turn, lean too heavily on management guidance without questioning underlying assumptions.

Outlook: Consumer Stocks Need a Reset in Valuation Thinking

While the broader market rally reflects renewed investor enthusiasm, FMCG stocks continue to underperform, highlighting a sector at crossroads. Kotak Institutional Equities believes a reset is needed—one that realigns valuations with realistic earnings potential rather than historical prestige.

Unless consumption demand materially improves and companies demonstrate sustained earnings momentum, Kotak warns that the Street’s bullishness on consumer stocks may remain misplaced.

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