STI India Limited (NSEI:STINDIA), a INR₹755.45M small-cap, operates in the consumer discretionary industry, whose sales are driven primarily by consumer sentiment and access to capital. These macro factors tend to determine the rate at which consumers purchase luxury goods. Consumer discretionary analysts are forecasting for the entire industry, a relatively muted growth of 8.28% in the upcoming year . Below, I will examine the sector growth prospects, as well as evaluate whether STI India is lagging or leading in the industry. View our latest analysis for STI India
What’s the catalyst for STI India’s sector growth?
E-commerce continues to be the fastest growing sales platform for consumer discretionary goods, changing the landscape for retailers. A large number of store closures and bankruptcies illustrates the shift in consumer preferences and increasing online competition. In the past year, the industry delivered growth of 3.81%, though still underperforming the wider Indian stock market. STI India leads the pack with its impressive earnings growth of 64.32% over the past year. This proven growth may make STI India a more expensive stock relative to its peers.
Is STI India and the sector relatively cheap?
Luxury goods companies are typically trading at a PE of 13x, below the broader Indian stock market PE of 27x. This means the industry, on average, is relatively undervalued compared to the wider market – a potential mispricing opportunity here! Though, the industry did returned a lower 6.98% compared to the market’s 9.83%, which may explain the lower relative valuation. Since STI India’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge STI India’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? STI India recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto STI India as part of your portfolio. However, if you’re relatively concentrated in luxury goods, you may want to value STI India based on its cash flows to determine if it is overpriced based on its current growth outlook.
Are you a potential investor? If STI India has been on your watchlist for a while, now may be the time to enter into the stock, if you like its ability to deliver growth and are not highly concentrated in the luxury goods industry. Before you make a decision on the stock, take a look at STI India’s cash flows and assess whether the stock is trading at a fair price.