There is that missed out feeling and still under-ownership when it comes to autos as well as auto ancillaries. Can these stocks move up further from here?
A lot of the auto shares have run up significantly. While you say it has got back to growth rates without the pent-up demand, I am not completely convinced of that argument. Maybe a few months ago when we were in lockdown, these were good stocks to buy. But they have run up and, maybe, they will do well going forward as well. But we need to see what kind of numbers come through beyond this festive season. I would like to just postpone looking at auto or making fresh purchases over there, until after we have the December numbers. We are convinced the sector has got back to at least double-digit type of volume growth rates in order to justify the runup we have seen over here. So I would suggest a bit of caution. It is not that we are negative on the sector. In fact it is one of the most promising sectors at this point of time if the volumes actually start to pick up.
There are certain very strong tailwinds for the sector in terms of lower interest rates and with all the baggage relating to transition to BS-VI and higher cost of registration and road tax and all of these other issues that had led to a slowdown in the industry now gone.
This space should do well going forward but it is just that the risk-return does not favour investing at this point of time. We would like to see consistent growth rates, and not just pent-up demand, not just festival demand. We want to see if the industry is back to its old trajectory of double-digit type of growth rate, be it for two-wheelers or four-wheelers. And then, we would like to look at investing in them. It does not matter if the stock prices have run up a little bit over there, but at least you would have good earnings visibility for the next few years or so. So we are waiting for that situation where we are convinced that the worst is over for the sector and the turnaround which we have seen over the past two-three months is for real and sustainable for many-many more months, if not years.
From the consumer basket are you tracking anything? Would you buy a Tata Consumer at this point, for instance?
Tata Consumer is a great story, and the focus that the Tata Group is giving to this business means you could see exciting times for the company as it goes about building the business in sectors or segments where it already has got strength. It may also go about perhaps acquiring companies or brands in segments where it is not present.
On the whole, because of the overall dynamics of the sector and the strength of the Tata brand, this company should do exceedingly well and a lot of it has already got captured in the stock price.
Our strategy for playing the FMCG stocks is to look more for Indian companies, and of course, Tata Consumer is on that list. But more interesting names would be something like a Zydus Wellness, which is a niche FMCG company and has a lot of product appeal among consumers because of their health benefits. The acquisition of the Heinz brand has certainly given it scale and I think this company will eventually get a higher valuation as it starts to perform more consistently. Apart from that, the likes of Emami, Godrej Consumer, Jyothi Laboratories have been laggards compared with a HUL or a Nestle. The may now start to outperform the overall FMCG pack. A lot of the Indian FMCG companies are very well focused on health as an appealing proposition, and in these times that theme resonates with consumers.
So I expect Indian FMCG companies to outperform the overall FMCG pack after two-three years of underperformance, PE multiple contraction and slower earnings. Maybe the next few quarters could be quite exciting for Indian FMCG companies. So that is where we are kind of focused on rather than known names like an HUL or a Nestle.
And of course one cannot leave out Britannia in the whole scheme of things, as we expect it to deliver a very good set of numbers for the September quarter. So that too could be an outperformer in the coming days.
SBI Cards is moving up constantly and some of the insurance plays were buzzing about yesterday. Any specific one that you are looking at currently?
At least life insurance premiums have started to come back to normalcy, and whatever figures they are coming out with on monthly premiums, they seem to be showing a very encouraging trend. But insurance per se is a difficult sector to understand. We have some bluest of bluechip companies over there. Street will take a while to understand the valuation and long-term opportunity. Although you know they are good stories on a long-term basis, but there are better options available at this point of time.
The strategy we are following in the market just now is going for companies that have got very strong growth momentum. Keeping that in mind, the top of the list in terms of sectors would be pharma, software, and then good opportunities there in banking and FMCG stocks where growth is fast coming back. Insurance companies never really corrected as much as some of the other sectors did. Even going forward, considering the trading multiples they have at this point of time, we see some fabulous outperformance within the insurance pack. Although it is a great sector and has very strong secular dynamics for the longer run, you may not see them outperform the broader market indices over the next few quarters or so. The outperformance will come from software, pharma, banking to an extent FMCG companies, and even autos. So that is where investors need to focus on.
Can one look at cement as a long-term investment from here on?
The industry has shown good compounding of earnings. There is a high degree of price discipline and that will eventually move up return on equity. Certain elements of stability and visibility have come through in their earnings. If real estate and infrastructure start doing better, then it would be better to bet on cement companies than on infrastructure and real estate; and you have a lot of choices in cement. At the same time, they have got good operating leverages and costs are under control. There are quite a few interesting companies in the cement space, which offer a lot of choices depending upon one’s risk appetite.
If you want to play risk averse, look at UltraTech and Shree Cement. There is a few good opportunities in some of the midcap cement companies, like say a JK Cement with 35-40% type of capacity, or even a Birla Corp, which has been subdued because of management-related issues, but is a very strong company otherwise. Once normalcy returns, you could expect higher PE multiples over there. So there are many interesting ideas within the cement pack. It is a good play on the economy; and it is a good play on lifting of lockdown and normalcy coming back. You could see the sector again get its mojo back and start performing at least in line with the index, if not outperforming. So we are very positive on cement per se. Go for companies where you expect expansion plans to go on stream in the next few months or so to take advantage of higher volumes which the consuming industries will now perhaps be able to support.