FMCG stocks now because they do not have enough business catalysts. Edited excerpts from his interview:
What is your understanding of the strength we are seeing in midcaps and smallcaps?
It indicates that the fundamentals of the broader market is improving. The expectations are being met. A company like Prince Pipes beat EPS estimates by 20-30 percentage points. This quarter will be a fairly good one, especially for export-oriented companies.
What is your reading of the management commentary of Asian Paints?
As a stock, it has underperformed in the recent past and so there is some amount of catch-up trade happening. While the prices of its raw material has moved up along with oil, given the second wave of Covid in Asia there is an indication that oil prices will remain in check. Therefore, prices of raw materials for Asian Paints will also remain in check. While the second wave of Covid will dampen the quarter for sure, it is likely to sustain after another couple of quarters.
Are FMCG names to be bought on declines?
I doubt if I would buy them now because they do not have enough business catalysts. The lockdowns might aid a certain amount of sales, but commodity prices as well as supply chain constraints are bound to bite them in terms of margins. They are unlikely to increase prices. Against this backdrop, we think it is good short-term trade but it is not an investment at this point.
What is the outlook when it comes to NBFCs?
NBFCs look okay from a valuations perspective. If you look at companies like Cholamandalam, the underlying demand is going to be weak at least for the next one quarter because of the spike in Covid cases. So companies like Chola or Shriram Transport Finance are going to be hit, unlike last year. Their books are fairly clean. For Mahindra & Mahindra Financial Services, they are going to be impacted as Covid has hit even smaller towns and cities. While the monsoon is expected to be good, the fillip side is the Covid wave. All this translates into a lower than expected loan growth for these companies. Fortunately, they have done good things in terms of increasing their provisioning, strengthening their balance sheet and raising capital. Their valuations are fine but there is no business catalyst.
