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Marico, Dabur could do better than HUL, Glaxo as downtrading returns: Mahantesh Sabarad

Rural-based low-end consumption stocks will be better off going ahead, says Mahantesh Sabarad. The lower end of the consumption story will be better off going forward if you have an event where agricultural output is quite robust. We see that crop area has grown and record foodgrain production is likely. In such a situation, consumption will probably be doing well.

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Last Updated: Jan 23, 2020, 08.20 AM IST
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Mahantesh Sabarad, SBICAP Sec-1200
Budget becomes a very critical trigger event for most of the consumption names because what will drive the consumption growth ahead is the government’s resolve to pump in more money into the rural, agricultural economy, says Mahantesh Sabarad, Head, retail research, SBICAP Securities. Excerpts from an interview with ETNOW.

What do you make of the last four-five days’ move in the midcap space? Did markets see a relief rally and now it is waiting for triggers from Budget as well as earnings?
Budget is the key trigger that will take stocks even higher. Mind you, from the earnings point of view, we are coming out from a low base for most of the stocks and particularly for the mid and the smallcap stocks. Also, the underperformance has been stark. That will start easing out now. The underperformance will soon move to the outperformance. Over the past few days we have seen the midcaps and smallcaps outperforming relative to the frontline indices.

The key here is that in the upcoming years, we foresee that growth on earnings front will be faster, given that the economy is recovering and the contracting credit cycle is likely to reflate once again. With more risk appetite coming to the fore, I also foresee stocks start doing well.

What have you made of the Zee Entertainments numbers? Also, there is still not much clarity with respect to the management, on the composition of the new board etc.
Results are not something that continue to be the focus for Zee, particularly because it is about the continuity of the business. It is about where the business is headed. Also there is this lurking fear that if Zee may be sold off to a suitor who given the current conditions of the promoter, may not offer a substantially high value to the company.

So at the back of the mind of most investors, this whole issue is about the promoters and where the company is headed. Desertion by some of the key management personnel is a worry also. So, results apart, I do not think that is what the market is looking at. We would rather want to know where the management is taking Zee. It remains to be seen where the next phase of growth comes from.

Given the kind of revival we are seeing in some of the pharma stocks, do you feel that this could be the right time to get into some of these names? Which pharma stocks are on your radar?
For far too long, pharma companies were US centric kind of businesses with the major growth coming from the US markets. That growth has either stopped or tapered off. While it is stabilising, there is an opportunity for most of the pharma companies to grow in the very small market over a low base. Among the stocks that we have recently examined and on which we have reason to give a call is Cipla.

Cipla is a company where 40% of the business comes from India and 40% from US. Over the last three years, it has been able to improve its margins quite substantially. Much of its US business is now developing fast thanks to its acquisitions that they have done in roughly about three years. They are promising almost one new drug launch in the US market per quarter and these are large value drugs. This stock is likely to do well. There was a concern over its Goa facility sometime ago, due to which the stock had tanked.

Asian Paints has been fairly steady in their quarterly performance. How are you reading their numbers?
It seems some form of margin contraction has come in. The low revenue growth could also be attributed to the fact that the price increases were not firm enough or there was a huge deal of discounting. The margin contraction could also be related to cost increases. So if you have a margin contraction effect with the bottom line meeting expectations, the forward estimates are likely to be revised lower. Asian Paints is among the priciest of the stocks in the FMCG space and therefore the effect of both the downward revision in earnings and the high valuations could probably affect the stock in the interim.

But let me be very clear here that Asian Paints is a stock that we like from a long- term perspective. It is not a stock that any holder should sell away from his portfolio. It is something that one needs to have in his core portfolio all the time. The long-term story is still intact.

How would you look at the consumption names now that inflation is on the higher side? Consumption is also seeing a slowdown. Do you think the downtrading trend which was not visible for a while, may come back for a lot of companies?
Yes, I think that phenomenon will continue. What you should look at from the inflation side is that core inflation is still either stuck in the same level or trending to be a little lower, while the headline inflation is very high simply because of the volatile vegetable prices.

When you look at core inflation, it tells you two things; one is that the core inflation remaining stuck at a particular level means consumption growth is not reviving as much as one would have anticipated. If that core inflation is trending to fall going forward, it portends bad news for the consumption stocks. Having said that, the Budget becomes a very critical trigger event for most of the consumption names because what will drive the consumption growth ahead is the government’s resolve to pump in more money into the rural, agricultural economy.

PK Kissan is a flagship project of the government and it is sure to receive more funds and more allocation as we go forward. That would help consumption growth. The lower end of the consumption story will be better off going forward if you have an event where agricultural output is quite robust. We see that crop area has grown and we are likely to see record foodgrain production. In such a situation, probably consumption will be doing well.

So rural-based, low-end consumption stocks will be in focus. The likes of Marico, a Dabur can potentially do well relative to Hindustan Lever or a Glaxo Consumer.

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