Bet on festive season with consumer durables or gold

If the government goes for 5G auction right now, it is likely to be under-bid and that would be great for Jio but if that does not come through, then even Bharti after it recovers from its recent fall presents a good buying opportunity at the current price, says independent analyst Anand Tandon. Where do you see opportunity and potential within the FMCG sector? How are you looking at the overall festive demand? From a portfolio perspective, one must have FMCG as part of the portfolio, but from the point of view of trying to make exceptional returns or outperforming the market, most of that had been already done even before we got into this kind of situation. It has been the best performing sector for many years now and that was largely because most of the other sectors were reasonably priced and were not showing the kind of earnings that was expected of them. Now there is some chance the cyclical sectors will actually do a little better going forward because they have come off a very low base and consequently the interest in FMCG has taken a back seat. To my mind the one part of FMCG which could still show higher than normal growth will be the spirit sector which stocks like Radico Khaitan probably could be interesting even at the current price. They are cheaper trading at around 20-21 times one year forward earnings which make them among the most cheap FMCG stocks. For the rest of the stocks, it is not as if FMCG is the one place that you would get a delta in terms of festival season. If you have to play the festive season, consumer durables or the gold sector are probably a better way to go. Reliance is now pushing for a fresh round of spectrum as well. That cost along with the AGR dues are going to weigh heavily on both Bharti as well as Vodafone Idea. That must be affecting these stocks.Clearly these stocks are not a near-term play. You have to invest in it on the assumption that you are looking at it over the next three or four years. My bet is that there will be a tariff hike largely because in order to survive, Vodafone has to keep pushing it up. Bharti will do a lot better in terms of being able to retain its own customer base. They already have a fairly good postpaid offering. In a sense what Reliance is trying to do by moving prepaid to postpaid is essentially trying to increase the yield so their ARPUs are also likely to be going up. There is no question that Reliance with huge cash in its balance sheet, is extremely well positioned and they will try to get a 5G auction going as quickly as possible simply because they have the money and the rest do not and that would mean the bidding will be a lot less tightly fought. But it would be unfortunate if the government were to give it in a hurry because all said and done, you need the sector to have multiple players and you cannot have a monopolistic situation from here on. Also 5G in its totality is unlikely to come through. What you are likely to get is a mix of 4G and 5G for backhaul versus the transmission from the tower to the consumer and that kind of mixed technology will take a while to settle down and so on. Net-net, my contention is that if they do come up with a 5G auction right now, it is likely to be under-bid and that would be great for Jio but if that does not come through, then even Bharti after it recovers from its recent fall presents a good buying opportunity at the current price. It continues to be a very concentrated unidirectional story in favour of IT and pharma. Are there still opportunities to buy afresh or would you say the run up has been pretty steep, wait for a dip?It depends. If you are looking at the sectoral play as a go-to, then most of the frontline companies are not cheap in either IT or pharma. However, there is always an opportunity to pick stocks and the midcap IT sector has been doing much better. Some of the product companies to my mind still continue to remain somewhat cheap relative to the larger companies as well as relative to the sector and therefore given that we are looking into a situation where going forward the order books are likely to be better then what we have seen in the last many years, the likelihood is that IT will continue to outperform. Pharma has caught on to a certain momentum. I do not know whether the numbers will justify it. All said and done, most of the frontline pharma companies barring Aurobindo are trading at around 25 to 28-30 times and some of them are even trading at 40 times which I do not think leaves too much upside possible. But right now you cannot argue with the momentum of the market. The domestic play in Torrent are not that well positioned because the domestic volumes have de-grown and are unlikely to recover in a major way. The real story in pharma has been the recovery in the US market and the regulated market where after many years, the price pressure and competition have eased off. Many of the API players have moved out of the US market because of the competitive pressures and that has allowed the established Indian players to gain market share as well to start trying to price it better. I do not think that it can sustain in terms of continual increase. However, compared to where we are coming from, the situation will look better. To my mind, most of the frontline companies are more or less fully pricing in the kind of earnings that we are likely to see for the near term unless new surprises come through. What is your expectation from the auto sector? Do you think the traction is likely to continue, especially for two-wheelers?The managements have been a lot more confident in the recent times and to that extent, we have to wait and see because the first few months after the Covid breakout were sales from the showrooms and now that the supply chain is kicking in again, you are probably getting the primary sales from the factory to the showrooms. Whether that also ends up in end users picking up volumes is something that only time will tell. There is no doubt that month on month, it will look better. Whether it looks better year on year is the real question. Some of the companies have started to report numbers saying that they are close to what they were selling the previous year but you have to remember that the previous year for most part was significantly lower than the year before and we have been having a slowdown in sales for auto in general, so much so that we are likely to end the current year with degrowth by half from the numbers two years ago. So it is not a particularly heartwarming situation to be in. Valuations have again picked up quite a bit. Tractors have done quite well for obvious reasons but the surprising bit is that the SUVs have also shown signs of traction in the LCV, HCV space and you are really looking to see if they have a scrapping policy coming through. If that happens then that can drive demand failing which, I do not think it is going to be much. The two-wheelers is a bit of a mixed bag because the volume growth in India is still lagging quite a bit and I would prefer companies which are doing exports to drive their markets overseas rather than just in India. The heavier vehicles may actually give you slightly better margins and so higher end motorcycles could provide a bit of a surprise. What is the outlook on Bharti Airtel? Is it a good buy at the current level?The stock has been grossly underperforming though the performance of the company may have been improving. I would expect a consumer to pay an ARPU of closer to Rs 250 on an average for most companies within a 24-month time frame which would mean a fairly strong growth in EBITDA for most of the companies that are currently operational. Even at that level, I am not sure Vodafone will be out of the wood and so there will be a push from the bottom. The key problem is obviously where Reliance chooses to keep the price point. So far there was an argument for them to try and keep it very low. Going forward, their attempt also will be to keep ARPUs up though may be in the near term, it looks like they have chosen to move from prepaid to postpaid and they will increase the ARPU that way rather than increase the overall prices. But given that they are now the largest player in the market, there is no reason for them to try and bleed in that segment. Overall you will have higher ARPUs which will mean that you will have higher EBITDA coming through for most of these companies leaving aside investment for 5G which is a bit of a joker in the pack. They are on a good wicket for reasonable cash flows. If the 5G auction comes through quickly, obviously all bets are off. I do not know whether the market is factoring that in because the stock is showing signs of weakness. Otherwise it should actually be showing and it should be reasonably well positioned for a fairly strong earnings growth from here on. Where do you stand amongst the FMCG plays? What about the likes of Dabur, Godrej Consumers etc.?I do not have a different view from what CK just outlined. They are reasonably expensive stocks from a valuation perspective and I do not think there is any great theme that you can find to distinguish between one or the other. ITC has been a bit of a problem because the tobacco valuation does not seem to be something that investors are willing to be paying higher values despite the fact that ITC is probably one of the cheapest, if not the cheapest tobacco stock in the world. ITC could spring a surprise by having a split in the company and separating their FMCG and hotel businesses from the cigarette business but the question would be what do you do with the cash flow coming out of the cigarettes? . To my mind it will benefit shareholders immensely if they were to do this split nonetheless. I do not think that in FMCG you are really looking for value as the one place where there is probably still value as well as growth and where I do not see a problem in terms of investors putting in more money is probably the liquor segment. Within the pharma names the front liners and also some of the others continuing to see a strength, what would you still prefer within the pharma pack?Most of the front line stocks have done quite a lot beyond what I would have expected them to do. From a positioning perspective, Dr Reddy is probably the best positioned and they will be reporting fairly good numbers going forward. My valuation comfort does not exist beyond the levels that they already are. That does not mean of course that they cannot continue to move up from where they are currently. On a slightly longer term frame, you would expect to see some of the other API companies which have not perform so well including Lupin, Sun etc. also joining the bandwagon, as things ease in the US. But they are all event-based plans that one has to look at and from a retail-investor perspective, if you want to take exposure to pharma, there are three excellent mutual funds that you may want to look at. Do you have any preferences within the media basket? The likes of PVR etc. have been firing up of late?If we have to be in media, I would rather have companies which are functioning rather than ones that may function. I would simply go with Zee. The numbers are beginning to look a little better than they have been. Advertising revenues are also picking up. Overall advertising spend seems to be going up in the industry as a whole and to me something like Zee makes a lot more sense. You have to keep in mind that these companies are going to face huge challenges from the OTT players. Therefore the realisations are going to get even further spread in the media space overall. You have to be very selective about where you get in some of them. They optically look cheap, especially the print media, but because of the state elections, some of the newspapers in the northern belt would have a bit of a spurt in terms of the revenue growth but over a period of time they have not been able to show any kind of sustained performance as far as stocks go. In the media, just stay with the leaders.

from Economic Times https://ift.tt/3n5VRue