Informist, Friday, Jun 28, 2024

By Anshul Choudhary and Apoorva Choubey

MUMBAI - Equity investors wanting to play the consumption theme in India need not necessarily flock to fast-moving consumer goods companies as there are a host of investible opportunities across sectors such as tourism and automobiles, Pankaj Pandey, head of retail research at ICICI Securities, believes. Pandey is not bullish on FMCG stocks that have started finding favour with investors again this past month due to the perception that normal monsoon and populist measures by the government will boost demand for such products.

"I really do not see much of a comfort on the valuation side...It wasn't there earlier also," Pandey told Informist in an interview. "Somewhere down the line they (FMCG companies) went too far in terms of driving the premiumisation," he added.

Due to their focus on premium products, FMCG companies have lost significant market share in several categories, especially food, to local competitors. While Pandey sees a possibility of large FMCG players regaining market share in such categories, he believes companies would need to sacrifice margins and go for competitive pricing in order to do so, which would hurt incremental growth.

Moreover, FMCG companies have enjoyed a "scarcity premium" in the past when other sectors were not performing, Pandey said. "It used to be the only sector which had the pricing power...which used to deliver low double-digit kind of a topline growth...now, expectations have changed," Pandey, who heads equity research for retail clients, said.

This uncertainty over FMCG companies' prospects makes Pandey underweight on the sector, especially because he sees the likelihood of several other sectors growing at a faster rate. The government's strong push on capital expenditure and resilience of the domestic economy--evident in a healthy GDP growth as well as other economic data--are at the core of his view.

He remains bullish on home building, hospitals, hotels, consumer durables, and two-wheeler companies, all of which have huge potential to benefit from the rising consumer demand in the country, especially for premium products.

Citing some real-life examples related to premiumisation, Pandey noted, "In hotels, there is a structural uptrend that is likely to stay for a longer period...Automobile is a better example where alloy wheels are now a standard feature;

consumers want more features when they are buying 100cc bikes." Even in the consumer durables segment, there are opportunities as customers no longer opt for low-end fans for 2,000-2,500 rupees or such products, he said.

Pandey is quite bullish on the hospitals sector due to healthy capital expenditure being planned in the segment, which will lead to capacity addition of 35-40% in the next four years. With Ayushman Bharat scheme, he expects the government to target the entire value chain. "...this is one area where we are lacking big time," he said.

TEMPER EXPECTATIONS

While there are pockets of good investible options among Indian shares, Pandey believes investors must not expect equity returns to mirror the stellar performance seen over the last year, due to expensive valuations. The Nifty 50 gave returns of over 28% in 2023-24 (Apr-Mar) and the Nifty Midcap 150 and Nifty Smallcap 250 jumped 57% and 63%, respectively.

Pandey expects equity returns over the next year to be lower than that seen in the last two-three years but still expects equities to beat other asset classes. For the Nifty 50, Pandey is factoring in 14-15?rnings growth in the next two years each and expects profitability to be largely unchanged this financial year.

If valuations stay high, returns could be lower than the overall earnings growth, he cautioned. However, he advised against booking profits for now and recommended holding on to positions, at least for investors with high risk-taking abilities.

Drawing similarities between the current bull run to the one witnessed during 2003-2007 (when the Nifty 50 rose over 460%), Pandey highlighted that capital expenditure remains strong, and spending by private companies is also looking up. "There is a capex cycle going on, similar to that seen in 2003-2007, and real estate growth will become more broad-based once interest rates come down, he said.

"...The solution would be to not exit the markets...the risk of exiting is far more," he said. Pandey expects India's GDP to grow at a rate of around 7% in the coming year with inflation seen in the range of 4-5%.

In this backdrop, Pandey continues to see a robust opportunity of generating wealth from equities. In fact, for high-risk investors, he believes there are options in mid-cap and small-cap stocks, while for those with lower appetite for risk, he recommends large-caps.

OTHER BETS

Apart from consumption-focussed companies, Pandey is also bullish on roads, railways, and energy sectors, as the government is looking to solve a lot of structural problems by spending more on these. He expects such sectors that have benefited from the government's capital expenditure push so far to continue to perform as key ministries remain with the Bhartiya Janata Party.

Pandey does not believe, unlike some other market watchers, that the BJP would have to announce populist measures as it is running a government in coalition with partners such as the Janata Dal (United) and Telugu Desam Party. "Number of seats by the BJP is quite strong and that is why the element of populism is not likely to be higher," he said.

However, Pandey agrees that the Union Budget will give clarity and details on the government's focus areas this term, and how the funding of populist measures, if any, will happen while keeping fiscal deficit in check. "Budget will be the first piece of paper to know how much diversion we are looking at the template earlier. If there are no major changes (in the Budget) then I think largely things are going to remain intact," he said. End

Edited by Vandana Hingorani

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