Consumer stocks offer good opportunity in medium term: Kunj Bansal

The agri commodities will clearly benefit the FMCG companies and the metal correction will benefit the consumer durables and the automobile space, says Kunj Bansal, Founder, Investment-illiteracy.com

PVR is looking at opening 125 new screens and pressing on the gas when it comes to capex. So much has been said about the reopening trade. What would your strategy for a stock like PVR?
Company managements have to keep planning for future growth. If you do not see growth in any business, then you might as well close it down. Now there are factors which will always keep coming, some factors will be short term, some will be medium term and some like Covid will be slightly more than medium term. But at the end of the day, a country like India with 1.3 billion population, has consumption across different areas – towards eating, housing, clothes, entertainment, travel, holidays, automobile purchases.

The question is about cycles but the managements have to keep planning for the long term. Secondly, a lot of times, managements also give an indication to the market that they are thinking about something which they may or may not actually be wanting to do or do over a longer time frame than what they have indicated. But they like to give some indications to the markets, to the analyst community, to the market participants so that there is some support for their market cap.

Keeping these two things in mind, for me particularly, these opening trades and these low return on capital kind of industries and stocks are never long term, medium term or long term investing. They always offer trading pops across different horizons from intraday to intra week to few days. In some cases, it may be over a few months also. Those are something that these kinds of stocks keep offering.

Let us also keep in mind that PVR and INOX have announced their merger and they have kind of become almost a 70, 80, 90% owner of the distribution market and they get a very good bargaining power over producers. That is also at the back of the whole development that is there.

One space which is coming under pressure is the entire FMCG basket. One was assuming that given the fact that commodity prices have cooled off and that these companies have already taken price hikes, going forward maybe the margin picture will get better. Is that not likely to happen or is it just the valuations which are keeping these stock prices under check?
I do not think it is the valuation which is putting pressure on the FMCG stocks. It is more the broader construct of the market which clearly is more in the hands of sellers and less in the hands of buyers. The overall pressure on the market on downside looks like continuing. In fact, index wise, we have recovered in the last week and maybe this week a little bit though this week, it has been more of a range bound movement of the market.

But within that, the sectoral pressures continue. If we look at today’s market, we can clearly see the severe pressure that is there in the BFSI and IT sectors which had brought up the market last week along with the auto sector which did bring up the market last week as well.

In addition to BFSI and IT, auto is something which still today seems to be attracting some buying but clearly the follow up buying has reduced. It is more coming back to the same thing and it looks like sellers’ pressure is there in the market than buyers now as the sectoral rotation keeps coming in.

More specific to FMCG, probably somewhere there is an expectation that the first quarter numbers may not show sales as the market has been expecting. There could be more negative surprises although the growth expectations are very low in some cases. It looks like the market could be in for a negative surprise given the way the inflation probably dent their demand, given the way the overall economic activity which was on the lower side specifically related to the retail activities.

Let us take a bit of a medium term. In 3-6 months or 6-12 months as a time horizon, do these companies and sectors provide a good entry opportunity or for adding positions? Or would you want to refrain from these sectors?
They do. Once we take a medium term outlook, the whole FMCG sector and also the consumer durable sector – the whole consumer space and even auto look good. So the durable, non-durables and automobile offer a good medium term investment opportunity.

The reasons for that are one, the overall commodity price correction that has happened both in the metals as well as the agri commodities. The agri commodities will clearly benefit the FMCG companies and the metal correction will benefit the consumer durables and the automobile space.

Along with that, automobiles has been seeing good growth, especially sub-segments like passenger vehicles and commercial vehicles. Let us see when it shifts to the two wheeler but if that happens then we will have further positivity added to that.

All the companies across these three segments have been taking price hikes and typically the price hikes are very rarely rolled back when the raw material prices come down. Some schemes or offers do get introduced, but very rarely are the price hikes rolled back and the benefit straightaway flows to the bottom line of these companies.

So keeping all these three, four factors in mind along with the overall correction that has happened in the market and in these stock prices, their valuations have corrected. They do offer good medium term investment opportunities.