How will the FMCG, IT and realty sectors perform in the future? Know from Mayuresh Joshi

Throughout the week, we saw discussions focused on the budget and this week too, you talk about infrastructure, defence, fertiliser or cement. What should we focus on now? Should we look at these sectors moving forward and reaching new heights?

No, I was listening to your opening comments, both on the macro and the micro. But there are two things happening here. One, I think the markets are waiting for what the possible budget announcements will be or could be.

Our own view at MarketSmith India is that there will be no significant change in terms of capital allocation for many of the schemes launched by the Modi government due to the reform process that has been going on for 10 years. Infrastructure development and infrastructure allocation are expected to double in the next five years.

As far as defence is concerned, it is going to have significant allocation. You must have already heard the statements related to rural and urban affordable housing. And so, I think roads, railways, highways, ports, infrastructure, manufacturing, capital expenditure will continue in terms of budget allocation.

The second part is how the market is actually likely to behave post the Budget and our expectation again is that there will be no negative surprises in the Budget. We are still on the path of fiscal consolidation and so the markets should take it positively.

The additional Rs 1 lakh crore will give the government enough scope for allocation for infrastructure as well as to reduce the fiscal deficit in general.

So, to that extent, a lot of the freebies that were expected by the market, which was feared, I think should not come. I think as far as the budget is concerned, it should have a more prudent allocation. And so, we will go back to income and expect income to be in the 30-40% range.

Domestic cyclical sectors will still continue to do well and there are many such sectors. You have pointed out this. You have seen sectors like defence, railways continue to be heavily leveraged but in our opinion, I think the infra theme, cement theme, water, water treatment, selective stocks within the water allocation could also be a big theme for the budget which should be looked at. Consumer staples, discretionary both selectively will start doing well.

With the expectation of a good monsoon, rural recovery in real incomes will start coming in the second half, which will also provide a significant boost to these segments of the market.

So, I think one should focus more on domestic sectors at this point of time, we believe a balanced and mixed approach in terms of your portfolio, including some of the pharma stocks, can certainly reduce the aggression in the domestic cyclical overweight that you probably have got. So, let’s remain optimistic towards the market.

Let us talk about the three sectors in focus. Firstly, in the gainer sector, you have the real estate sector. Do you still see further upside in this rally, given that PMAY has been extended? And on the other hand, you have noticed that FMCG and IT are the biggest laggards today and I can’t help but notice that four out of the five biggest losers in Nifty 50 are from your FMCG and IT sector, i.e. HUL, Infosys, Tata Consumer and ITC. What is your future for this sector and do you see further upside in the rally in terms of real estate?

I think this is a natural trend. The market is bullish. I think a lot of these defensive sectors have gone into a comfort zone. So, I think depending on how the monsoon plays out this time and what appears to be early signs of a normal monsoon this time, even above average in some areas, I think you can expect a decent comeback as far as rural incomes are concerned.

Rural still has a large share in FMCG sales, so as rural incomes start to improve and discretionary spending also picks up, you will see sales grow significantly.

So, I think a lot of ad spends are happening, a lot of grammage increases are happening, without any price increases, all of that will normalise, which will lead to better numbers in the second half for a lot of these FMCG players.

For the realty sector, I believe we are going through a six-year cycle, in the third and fourth year as well, with two more years to go, historically we have seen real estate cycles go by.

The pre-sale momentum for most companies, you would have seen the products launched by DLF got sold out in a week, for example some of the products launched by Sobha got sold out. The product launched by Kolte-Patil in Pune got sold out in a few weeks.

And so, I think the appetite in terms of premium and above-par assets, which are above the notional values ​​that an average investor probably pays, still looks pretty good.

And to that extent, I think real estate developers have done a good job. But real estate accessories is something that should start focusing on now. Greenlam Laminates, Century Ply are examples of this.

They are absolutely right at this juncture. They have suffered a lot in the last few quarters because of input cost inflation. Volumes will come back because now new homes are being built, obviously those new homes will require renovation and renovation work will continue in existing homes as well.

So, I think real estate proxies, ancillary stocks can do well. For the IT sector, I strongly believe one should wait for the Q1 data.

Midcap IT performed relatively better than largecaps. Order flows have remained consistent, margins have remained consistent, revenue growth as well as pricing related commentary have also remained consistent.

But for largecap IT in general, I think what is happening with the three largest sectors, BFSI is still going through some pain in North America.

Retail and manufacturing should start showing signs of improvement in the second half, both in the Euro context and the US context. There could be some volatility in terms of pricing and orders. So, wait for the first quarter data for largecap IT. But anyone holding midcap IT can continue to hold it.