Futile To Predict Blue Sky For Indian Consumer Stocks, Says Motilal Oswal's Gautam Duggad

Gautam Duggad: Zomato, when we initiated last year in April, was at the price of Rs 55. Then, we added it in our model portfolio at Rs 75. We're still holding it as one of our top ideas in the model portfolio. We also raised the target price yesterday (Thursday) after these results to Rs 300. And I thought, that's a decent upside.

But looking at the way the stock is behaving today, pretty soon that upside will be less than 10%. Now, the issue is predicting Blinkit is becoming difficult because they are defying all expectations. If I look at my numbers, you know our DCF based target price is Rs 300 and we are assuming a 75% CAGR for Blinkit and now Blinkit contributes Rs 171 out of that Rs 300 of target price that we have put out. If that 75% number drops to let's say 50% CAGR, which you would recommend, it's still a very decent number. In that case, the target price drops to just Rs 180 and the value of Blinkit comes off from Rs 170 to Rs 100 per share.

So, essentially the upside that we have seen in the last 3–4 quarters is being led by Blinkit, whereas the food delivery business has stabilised now. It's in a steady momentum. The real upside, that you have seen over the last one year or so, has come on the back of phenomenal GOV growth that you have seen in Blinkit.

Our expectation is that it is going to be very difficult to predict some of these numbers for a stock like Zomato on a quarter to quarter basis. So if you're holding it, I would suggest that you keep holding it because it's in uncharted territory right now—both, the business as well as the stock valuation.

Now Zomato, you know, basically if you look at it after today's rise or whatever 17–18%, the market cap is now almost touching Rs 2.5 lakh crore. Incidentally Niraj, because a couple of other consumer companies also reported numbers over the last 3–4 days, this Rs 2-trillion number is becoming a good threshold now. Even Trent crossed Rs 2-lakh-crore market cap the day before yesterday (Wednesday), Varun Beverages crossed Rs 2-lakh-crore market cap a few days back.

These are all companies, which have very different sort of or rather slightly differentiated positioning in their respective core businesses. They are not your typical, plain vanilla simple consumer businesses which have been consistently growing at, whatever 8–10% for the last 15–20 years. These are businesses which are growing at more than 30–40%.

I remember, for Trent, we have been raising earnings estimates for the last three quarters by 15–20% each. It is a stock, which we upgraded just a year-and-a-half back to Rs 800. Today, it is Rs 6,000. So, in consumerism there is a very divergent trend, which is playing out. Wherever there is growth, market is very, very discriminating in terms of the valuations that it is according to them. And wherever the growth is very subpar or normal 8–10%, market is just not interested in looking at them.

You look at Varun Beverages. Three years back, the profit used to be Rs 320 crore. They closed CY 2023 at Rs 2,100 crore profit. Our expectation for the next three years is Rs 4,200 crore profit. So out of nowhere, Varun Beverages, in the last six years has now become a Rs 2 trillion plus kind of a market cap.

So growth is becoming a single-largest differentiator across the Indian consumption space, whether it is staples or whether it is discretionary.

Gautam Duggad: No offence meant, but I think it is futile to predict blue sky scenarios for some of these stocks and I will give you the reason.

Titan is a stock that you know has been for the last 15 years our top idea now. I remember on the day of demonetisation, the price of Titan was Rs 360 or Rs 350. From there, in eight years, it has now touched almost 10x.

It's the only consumer company of a reasonable size in the last five years, which has compounded top line and bottom line both at 20% plus. And at every price, the stock was expensive—from Rs 100 to Rs 200 to Rs 350 to Rs 500 to Rs 1,000 and now whatever at Rs 3,000 odd levels. Even at Rs 1,000, if you had done blue sky, in three years, if you were very generous, you would have reached a target price of Rs 1,700–1,800. The fact of the matter is that that stock is at Rs 3,500 today, right?

You look at Trent. You know, we've been having internal conversation after we upgraded the stock to Rs 800 two years back. At every 20–30% rise, we discuss the numbers. How's the stock looking? You know, it's too expensive. So, we had this conversation when Trent was at Rs 1,400, then at Rs 2,800, then at Rs 3,500. The last conversation that we had was three months back, when it was at Rs 4,000.

We realised that they were beating the estimates that we are pencilling in—both on top line and bottom line. Then we reached a simple conclusion that till the time you know, till the time some of these companies do not disappoint on expectations of growth, there is no point just taking a particular P/E as an anchor and moving away from the stock because you could have pretty well done that at Rs 3,000 for Trent even seven months back, because at Rs 3,000 also Trent was not cheap or rather at Rs 1,500 also Trent was not cheap a year back.

So there is no set formula to put up blue sky, because all of those numbers in companies like this where growth numbers are beating your expectations by a wide margin, those blue sky scenarios become academic now.

So you're seeing that with Zomato, it's playing out right in front of you. In April 2023, the price was Rs 45. We initiated at Rs 55. Our first target price was Rs 80. The fact of the matter is that today, because of the series of beats in estimates for more than five quarters now, we are ourselves putting a target price of Rs 300. I mean, a year back, I would not have imagined that the 2026 profit estimates for Zomato would be Rs 3,000 crore or for that matter, Blinkit would become such a big driving force of the overall valuations of Zomato.

So, you have to build your own guidance. You have to build your own comfort zone around growth and then operate within a reasonable band on that. Forget individual stocks, even at Nifty when last year in August, we were doing a blue sky scenario exercise for Nifty, it was around 18,500 or 19,000 then. We took 20 times P/E to FY25 EPS which is a standard P/E for Nifty. We reached a target of 22,800 and because we were looking at blue sky, we assumed the government would win the elections. PM Modi coming back, political continuity, strong balance sheet, all of that and we applied a 10% premium to that. So we reached a target price of 25,150 for Nifty on a blue sky basis for calendar year 2024.

Today, it's a base case now or rather it has already come. So, in a market which is so furious with liquidity, sometimes these conventional parameters of valuations or blue sky scenarios make no sense.

Gautam Duggad: I had put out some data two weeks back on defence and railway stocks. Let me give you the brief highlights of that data.

You know, three years back—I'm talking about July 2021—the market cap all defence companies put together was Rs 1 lakh crore. In March 2024, their market cap was Rs 6 lakh crore. Today, it is Rs 11 lakh crore. So, in three years, the market cap has gone up 11 times for defence companies. Profits have doubled. From Rs 7,000 crore to Rs 17,000 crore. So, trailing P/E which was about 13–14 for defence in July 2021 or rather, I mean 14–15 because Rs 7,000-crore profit and roughly Rs 1 lakh crore market cap then, so you can say 15 P/E. Today, the trailing P/E is 60 for defence companies.

Do remember, unlike consumption, in defence you are also dependent on government policy because the government is the single-largest customer. So to that extent, the vulnerability in policy and decision-making can have a disproportionate impact on valuation multiples of B2B stocks like defence. I'm not saying growth is slowing down or anything. We don't have a coverage. So we don't have estimates there except for Bharat Electronics, which is part of our model portfolio. But I'm saying, broadly, if you look at top down on defence or railways, they are hostile to government policymaking. For the last 10 years they have had a very favourable and a benign policy, you know, backdrop.

Look at railways similarly. A year back Rs 1-lakh-crore market cap, Rs 7,000-crore profit again. Today, profit is Rs 13,000 crore, but market cap is Rs 7 lakh crore. So, what was a 10 trailing P/E has become 55 or 54 trailing P/E. So, put together if you do because both of these sectors have been in tremendous momentum, together they had a profit of Rs 15,000 crore three years back on July 21, when the market cap was Rs 2.25 lakh crore.

So combined trailing P/E was 50x. Today, combined profit is Rs 30,000 (crore) and combined market cap is Rs 18 lakh crore. So, 60 trailing P/E. So, while they can continue to grow, you have to just remember two things—they are dependent on government policy making, the political matters. And, at the same time, you're getting into the stocks at 60 P/E.

They're not consumer companies where you have 100% free cash flow conversion or good dividend payouts and stability in growth because you can predict the growth in consumer companies, at least in stable companies. I know that in Zomato and all you cannot, but broadly when you look at the consumer basket you can predict. In defence, you have to take a call every 3–5 years.