Auto outlook strong; avoid consumer stocks for next 2-3 quarters: Pankaj Murarka
Synopsis
“Consumption stocks likely to underperform for the next six to nine months.”
The whole specialty chemicals complex is going through a very strong growth curve and that is primarily driven by the fact that China plus one has become central for all the global companies where they want to diversify their manufacturing base from 100% concentration in China. For them, there is no other better alternative than India.
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The growth outlook from a medium term to longer term point of view remains very strong. Having said that, as you rightly said, the stocks have had a phenomenal move over the last year or so and valuations in the sector are extremely rich. It is very difficult to make a judgment as to whether all of it is priced in or not.
I firmly believe that if one stays invested in good quality companies within the sector, then over a medium to long term, there is still a good investment case to be invested into these companies and make reasonably healthy returns though in the short term, those stocks could be volatile because last year has been euphoric for them.
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One thing which is very evident is that these companies are facing tremendous cost pressures where the raw material costs across the board, be it staples or fast moving consumer goods.
At the same time, they have been cutting back on some of the other expenditures including advertising and trying to bring in more efficiency in operations. As a result, we have seen across the board very strong margin pressure in all these companies where their gross margins have come under tremendous pressure and probably that pressure will continue over the next two to three quarters.
What is your take on the auto space? How would you approach this sector? We have good operating margins coming in from TVS and the likes of M&M and Hero MotoCorp will also be reporting numbers later this week. We had the big bull himself talking positively about Tata Motors. Do you like this space and what will be your pecking order?
The whole sector got adversely impacted during the last two years because of Covid because mobility was impacted and everyone was in work from home mode. But now as the lives and business are normalising, the whole mobility sector with auto transportation or the headlines are coming back to their normalised growth levels. We are seeing that demand recovery across the segment – be it two-wheelers or passenger vehicles or commercial autos.
The outlook for the sector remains strong because as India recovers, we still have significant low penetration across the segment, especially in passenger cars and that will keep growing and more importantly, as the economy recovers, commercial vehicles will see strong demand.
We are already seeing very strong demand and commercial vehicles overall volumes are significantly below their peak volumes four years back. Directionally, for the sector as a whole, the growth outlook remains strong. The margins were impacted somewhat because of sharp rise in commodity prices, especially steel and aluminium and to some extent, their ability to produce was constrained because of chip shortages.
Going forward into the next year, steel prices have started moderating and the chip supplies will also start improving significantly. From next year onwards, we will see a combination of very strong growth in the sector driven by volume growth and their margins will come back. The outlook for the sector remains strong. We remain more positive on the commercial vehicle plays because of a strong underlying view on the strong recovery of the economy as compared to the other segments of the market. Our bets are on the commercial vehicle space in India within the auto sector.