How to play defence and premiumisation themes

Synopsis

“With valuations way up there, FMCGs will tread water for the next couple of quarters because there are no real signs of an acceleration of push. But there are pockets where you will start to see spending because things like, four- wheelers SUVs, which are rural plays but also election related plays.”

Chakri-Lokpriya2-1200ETMarkets.com

Chakri Lokapriya, CIO & MD, TCG AMC, says “there is a huge amount of business momentum for all these PSU companies including defence names because there is now an expansion across Army, Navy and Air Force and a huge amount of electronics demand. Those are higher margin businesses and therefore, the multiple will support the earnings growth.”



How are you reading into stocks with a rural link? Given that a lot is working for our economy, that rural slowdown still seems to be a little bit evident and could be a bit of a stumbling block for a lot of stocks that are connected to the rural side of the story.

Indeed, FMCG companies where there has been no volume or margin increase and no pricing power to support the whole story. With valuations way up there, they will tread water for the next couple of quarters because there are no real signs of an acceleration of push. But there are pockets where you will start to see spending because things like, four- wheelers SUVs, which are kind of a rural plays but also election related plays, will see an acceleration. We need to match out these two but pure rural is likely to be weak.

What is your take on the defence base? Are all of the positives already in the price or on the back of these gradual order wins and the road ahead looks rather promising?

The road ahead indeed looks very promising because after all the run, the valuations are still pretty much intact. With all these orders, we are seeing an acceleration of earnings. This is in fact, the opening about more business momentum. There is a huge amount of business momentum for all these PSU companies including defence names because there is now an expansion across Army, Navy and Air Force and a huge amount of electronics demand. Those are higher margin businesses and therefore, the multiple will support the earnings growth.

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We have been talking about this premiumization theme playing out, be it within the retail space, within the auto space, etc. and the numbers really are a proof of that. What do you make of the premiumization theme? How would you look to play it from a stock market angle?

From a stock market perspective, there has been premiumization and the lower end of the consumer has been weak and is likely to continue to remain weak until the interest rates kind of start moving down.

In terms of Aditya Birla, they have been making these premium acquisitions, whether it was Sabyasachi some time ago or now Louis Vuitton and these are the very low volume but very high margin businesses. In the case of Sabyasachi, the founders still around helping in the transitioning this is important. So premiumization as a story is generally good for, but for AB Fashion, you have a combination of both mass as well as premium products. I am not kind of sure how it fits into the overall margin profile of the company.

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