What would be your pecking order in FMCG companies which are also seeing a big runup?
The intensity of the raw material prices over the last one year is going to put some pressure on the margins for some of the consumer led companies. So, our pecking order in terms of the consumer names would start with HUL. We also have Dabur as one of our top largecap picks along with Godrej Consumer. Within the midcap universe we prefer Marico at this point of time. We have to also reckon with the fact that the overall space has undergone some sort of an underperformance and even its weight in the Nifty is at a multiyear low. As part of a rotational change that we see time and again, some interest may return to this particular sector. From an investment perspective, we have a positive view on some of these names.
ITC has got ESG concerns over tobacco and so one should not buy it; United Spirits is a play on demographics and one should buy it. Your view?
ESG can be a good popular theme when it comes to global investors but at the end of the day, what matters is how the company is positioned, how it has been performing in a given situation and what kind of potential we see in terms of earnings triggers going into the next two or three years.
Just to give a little bit of a perspective, everyone is talking about United Spirits of late but over the last five to six years, the stock which was around Rs 400-450 has just gone up to Rs 1,000 whereas many other companies in a similar category have gone up three, four, five and more. So there has been a relative underperformance for a name like United Spirits over the last five to seven years.
Secondly, recent data points show that overall growth volume because of the new management and the open up theme is catching up fast and there is definitely a liking for a name like United Spirits and we do have a positive view on it at this point of time. But one has to remember that it is not a story where there is a consistent delivery of volume growth and when you give this kind of high valuations, the expectations continue to be very high. So, we have to take a view quarter on quarter in terms of how the company delivers but from a brand franchise, demographic and lifestyle change perspective, this is one of the few companies in the market where one would really want to have an allocation.
How are you assessing the entire pharmaceutical space, especially as the last two earnings from Divi’s and Aurobindo Pharma have been weak?
Over the last three to four months, pharma has been a bit of an underperformer and even the quarterly numbers of most, barring one or two companies, have shown some sort of disappointment either in terms of the US sales or margin pressure and things are not looking that great. We feel that after a strong performance for the last two years, maybe the rotation change is taking its course in terms of the pharma valuations and movement.
Within the sector, we feel that Sun Pharma and Divi’s are the few large cap companies where we have an extremely positive view. Gland Pharma is something that we like within the midcap space. We have coverage of Laurus and other companies, but till we see incremental triggers, they may not really perform in a big way. So from a near term perspective, the triggers are very little but from a stability perspective, if one wants to invest in pharma at this point of time, Sun Pharma and Divi’s are the names to go with.
Are you a part of the camp that believes the worst is over when it comes to banks? From the private lenders perspective, what is your pecking order?
The result season has been extremely good for the entire banking and NBFC space and the management commentary by and large has been quite positive. We think that once growth comes back in terms of the loans, that is where we will see far more action in terms of earnings upgrades. People are feeling far more confident about the sector. As of now, there are no incremental negatives in terms of slippages and people are finding a lot of comfort with the provision coverage and the overall management commentary about growth.
In banking space, there are two names that we have been associated with for a long time. They have been big outperformers and so we would go with ICICI Bank and State Bank. Both of them have been outliers in terms of stock price performance and also in terms of the earnings growth that they have delivered in Q2. When it comes to the midcap names, we would go with Federal Bank. We have a coverage on IndusInd Bank but the recent instance is something that one would really have to do a little bit of a deep dive as to really what is happening. But we do like IndusInd Bank for the kind of growth that they have delivered and the overall management bandwidth. But for the time being, we would wait and watch but continue to be extremely positive on the sector.
