Will the festive season revive the FMCG sector? Mahesh Patil answers

“However, they have outperformed, but we have also seen that companies are doing much better and some of the PSU companies, their profitability, the way they manage their balance sheet and also capital utilization, capital allocation than before. There is some case for re-rating compared to what it was about five-six years ago, says Mahesh Patil of Aditya Birla Sun Life AMC.

So, given that the markets still haven’t recovered by 10%, could there be a further correction?
Mahesh Patil: We’re already down 6-7%, so 10% is just a number I’m putting, but it’s a decent correction.

So, you expect the market to consolidate for at least a little longer?
Mahesh Patil: Could be, yes. We’re in that phase of consolidation or some re-establishment in terms of earnings and at least the breadth of the market continues to weaken and that’s what we’ve seen, especially after the election results. Since then, in the last four-five months, the breadth has weakened. So, while the indices are not down much, I mean 6% to 8% if you look at it, but stocks are significantly below their all-time highs.

So, referring to stocks that have come down significantly from their all-time highs, PSUs are a basket that has declined and especially the defense and railways space. Now, PSUs were the talk of the town in the first half of this Samvat. And right now if you look, they are down about 40-50% from their recent highs. So, now when it comes to the PSU basket of defense and railways, do the valuations look better?
Mahesh Patil: Again, if you look at defenses and railways compared to historical levels this is very narrow as some of these stocks are looking very high as these sectors are completely out of favour. Not much was happening in the sectors. Obviously, there are some structural drivers in this space because of cost or India is trying to source more from domestic on the defense side. So clearly, you can’t compare these stocks historically because descriptively, the estimates there are better. But valuations are clearly still a bit stretched there.

And again, you might see some implementation delays there. We found that when expectations are high, people already factor the future into the present, whatever that may be. But you’re going to see some execution challenges there and that means you’re going to see some sort of more drawdowns there. But I still think the valuation is a bit stretched. But mostly, PSUs, if you look, there are other sectors like utilities or oil and gas side, which are not as expensive. So, it’s not enough to generalize PSUs as expensive.

Although, they have outperformed, but we have also seen that companies are doing much better and some of the PSU companies, their profitability, the way they manage their balance sheet and also capital utilization, capital allocation than before. Very good. So in the past, there is a case for some re-rating from what it was there about five-six years ago.

And if you compare from last Samvat to this Samvat, FMCG is also a space which has not left the market behind. The returns are the lowest and in fact, if you look at other sectoral indices and given the fact that while the second half is expected to be better from a consumption perspective, consumption is expected to pick up. So, do you think FMCG can be a good basket for investors to put their money in or is the valuation still high when it comes to the FMCG sector?
Mahesh Patil: So, FMCG, there were expectations leading up to this festival. You see, I mean, the rural economy has underperformed because it is weak. We have seen some pickup in the rural monsoon was good and the second half will be significant, although it was still disappointing results, festive season, volume wise at least in the last quarter.

But more than FMCG as a consumer basket, I think a little bit more discretionary consumption is where it would be better than a little bit more, because if you see the growth and recovery there could be better. Consumer staples are also facing some challenges from D2C brands and there are certain categories where we are seeing some impact on their market share.

There is only one follow-up, so at the beginning of the last couple of years, it was about the K-shaped recovery and how the urban end of the world was doing well and we were all looking forward to the rural recovery. Now even urbanites are showing signs of slowing down. In that context, all these stocks, let’s say real estate and luxury are good, would you bet on it as a multi-year trend or would you stay away from it for now?
Mahesh Patil: No, the trend is clearly there. I mean, if you look in terms of per capita income growth in India, I mean a structural trend rather than discretionary consumption and young India is more aspirational. So, we’ve seen a trend of premiumization that’s on the auto side, whether it’s consumer durables, real estate side, I think that’s going to continue. I don’t see it as a challenge. In the short term, you will see a kind of fatigue there. They have done pretty well in that sense but that premiumization trend will be a long-term trend that will continue, I would say.

What is the multi-bagger idea, you don’t need to name the stock, you can name the sector other than financial, I think you mentioned.
Mahesh Patil: Multi-bagger Where the market is at the moment I would say that multi-bagger seems hard to predict anything. But stock-specific, the market will now become more stock-specific. And larger macro themes have played out to a greater extent. So, I don’t see any, but you always… for stock pickers and there are always multi-bagger ideas.

So, any sector other than finance?
Mahesh Patil: I still think that in consumer discretionary retail I think we’ve kind of seen a slowdown where there’s digital transformation and where the growth, the long-term growth path might be better and that’s what I think the near-term if they get back to normal. If growth concerns are able to come in, these are sectors that have traditionally been high-growth sectors that you could potentially see a recovery in earnings growth as well as a PE rerating.

What would you say is the learning from last year?
Mahesh Patil: So, I think the learning from last year would be that A) Clearly, everything moved up last year. Risk-taking was disproportionately rewarded and money was easy to make. But I think the learning is that we’ve seen it now. The easy money is over now, you’ve got to be really, really careful because as liquidity pulls back a little bit and we see momentum slowing down on earnings, it’s got to be much more prudent and really focus on your fundamentals. Must see, I guess. Getting back to fundamentals is what we can see going forward.