Amnish Aggarwal spots multi-year trends in 4 sectors

Amnish Aggarwal, Head-Research, Prabhudas Lilladher, says “there are some sectors or stocks that represent the multi-year trends; one clearly is capital goods which benefits from the recent state elections results as the uncertainty with regards to the next Lok Sabha elections has got reduced. So the capital goods companies, whether they are on the engineering side, railway side, defence should continue to do well. We like Siemens Hindustan, Aeronautics, and Carborundum looks good. The entire capital goods is one pack which looks very interesting to us. ”

What is your view on HUL and the rest of the FMCG players like ITC? Do you think in terms of the sector churn that we are seeing, the FMCG companies will not be in those top three, top four bets that investors would be looking at actively?

We have been having an underperformer in our model portfolio. We are actually having lower weightage to the consumer sector from quite some time and that too the weightage is lower more for the consumer staples. Now, if you look at say past two-three quarters, the volume growth has been below par and mainly impacted by the slower than expected recovery in the rural demand, so that is one.

Secondly, particularly in the previous quarter, the margin expansion which was being anticipated on account of lower raw material prices, has also not been to that extent. Now given the backdrop that the rural demand is tepid plus most of the large companies they are facing increasing competition from the unorganised smaller or regional players has put these companies in some sort of a tight situation in the near term. So, given this kind of a scenario and the fact that barring one or two, most stocks are still trading at high PE multiples, any significant re-rating for the major consumer stocks looks unlikely.

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But do you think there-rating that we have seen in the power stocks is going to multiply from here? The move on Tata Power today is nothing short of spectacular.

This is a classic churn which is happening and it is not a one-day affair, because maybe for more than 10 years, there was a very easy trade that sell the asset heavy companies and buy the asset light companies or the companies where I would say the balance sheets are lighter or better. For example, you look at consumer stocks, banking, particularly the private banks or some of the other such sectors where the return ratios were good and the capital requirements were lower. So, all these sectors remained in the limelight for a considerable period of time.

However, for the past few months now, a classic sectoral churn is happening where some of these PSUs, some of which are asset heavy companies, are coming into limelight. Given that economic growth in India is happening and power demand is increasing in mid to high single digits, that is a perfect recipe for growth of some of these power companies because the power consumption in India overall is low and particularly if you look at the way now electricity has reached practically every village of the country and as people they start using more of the appliances, more of white goods and all the power demand is only going to increase.

So, power stocks, in the near to medium term, might remain firm because the gestation period to setting up these projects is also considerably high.

The other space to watch out for is IT. Today is the last date for retail viewers to tender in the TCS buyback if they want to. Though it does not seem there is much money on the table as far as TCS is concerned. But what is your view on the sector?

IT services has been underperforming for quite some time and we have seen recently that the Tata Tech IPO did well. But companies like Tata Tech, LTTS, Cyient, KPIT are in the very niche segment which has been growing at a pace which is much faster than the overall IT services industry.

For IT services companies, their fortunes are directly linked to what happens particularly in the US and European economy and Europe particularly is under a lot of pressure. The US has still done better and it has held on but the visibility in terms of growth still remains neutral for the next one or two quarters. So, if you look at the sectoral rotation and where the stocks are traded, maybe in terms of the multiples they might have bottomed out. But as of now, the bet seems to be more in favour of the niche segments where the companies are doing better, the growth rates are better.

I think maybe a couple of quarters down the line, the fortunes of the other biggies like Infy, TCS, etc, will also start improving with the growth rates inching up. I would say that some of these names may be considered from the next 6-month or a 12-month viewpoint particularly on dips when the valuations are on the right side and the news flow is on the negative.

Are you spotting any other contra trends in the market?

I would say rather there are several contra trends like I have highlighted in my previous discussions with you also. One contra trend is very clearly visible today, the tepid consumer demand. Our PVs are doing well, even premium autos and two-wheelers are doing well. Jewellery is selling well. But in a similar vein, the consumer staple companies are not doing well. Even the QSRs are not doing well. This is clearly some sort of a shift of spending, that is happening as far as the consumer wallet is concerned. So this is one trend which I am very clearly witnessing that the discretionary segment or certain segments are gaining, whereas common things are not selling.

The second trend, which is very clearly visible is with regards to the rural demand. Post-Covid, the demand actually never came back like it used to be earlier. Then we were pinning hopes on, say, last year that the crop prices will be higher than this year. El Nino has come. So somehow, somewhere the things again shifted to that it being an election year, the government will increase the spending and then the demand will come back. But somehow that has not translated to that extent. So one clear trend which seems to be there even in the case of rural demand, is that today, even from rural India, from tier-4 towns, people use platforms like Amazon or Flipkart to order and there the GOV during the festival season was up by 40%.

But if you look at the on the ground sales of the general trade in some of these items, the sales are not happening. So maybe the wallet share is shifting. Maybe the channels of distribution are shifting. But these are some trends which are seen within the sectors, within the segments.

I think there are several trends which are flowing at the same time. And one trend, which is very clearly again visible, which has been highlighted by RBI and I think some of the large banks also in the past, maybe that personal or consumer loans, the way they ballooned in the last two or three years. So some red flags which could be visible over the next six to 12 months.

But all of these sectors that you have talked about, K-shaped recovery, consumption, the RBI circular, in terms of stocks, which are those top recommendations from the house of Prabhudas Lilladher right now?

There are some sectors where we have been very positive and I still believe that these sectors or stocks represent the multi-year trends; one clearly is capital goods. So capital goods, particularly post the recent state results, now that the uncertainty with regards to the next Lok Sabha elections has got reduced. So the capital goods companies, whether they are on the engineering side, railway side, defence should continue to do well. We like Siemens Hindustan, Aeronautics, and Carborundum looks good. The entire capital goods is one pack which looks very interesting to us.

In addition to it, hospitals is another segment which we are very positive about. One of the stocks we have been pitching to investors has been Max Healthcare, where there is a lot of brownfield expansion which is coming into play next year. That stock should do well, even from the current levels. These are two baskets and the private sector banks are where the valuations are, I would say, at a multi-year low.

And on the consumption side, we have been pitching for some of the discretionary names, although whether it is a Titan or an Avenue Supermart, they are, these are not cheap in terms of valuations.

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