S&P BSE Consumer Durables has given absolute returns of 48% (Dec 31, 2013 to Aug 06, 2014). During this period the sectoral indices that were laggards were S&P BSE IT (8.22%), S&P BSE Teck (9.66%), and S&P BSE FMCG (9.70%) even though when Sensex gave returns of 21.39% in this period.
There is an uptick in the sentiments of many investors after the formation of the new government. The story that led to the euphoria was that there was a new and strong government after many years and the new prime minister has a track record of performance. This was further supported by reports of increase in construction activity. But according to an economic alert by Standard Chartered as on August 11, 2014, “A favourable base effect and delayed rains likely boosted construction activity and production of construction-related materials. The revival in domestic demand has yet to provide support for manufacturing activity; the favourable base effect for mining and electricity might fade in the coming quarters.” This could in effect result dampen on the sentiment in the overall market and hence investors may look to deploy investment in the IT and FMCG sector. This raises the pertinent question for investors if these defensives are the new contrarian?
Divergent views
Sankran Naren, CIO, ICICI Prudential AMC believes that from a price-to-earnings basis, most of the consumer stocks are still trading at about 30 times. “Owing to that, we continue to be underweight on them, but having said that, the business models are robust and if there is a slowing down of the monsoon, it would affect this sector as much as it affects the auto sector. We believe that the sector is not attractive at this point of time, but if the valuations were to correct, it will offer a reasonably good investment opportunity for the long term,” says Naren.
He considers that, IT and pharmaceuticals are fairly valued sectors. But Naren also highlighted that whenever there is a global risk off, these are sectors which are likely to outperform the market on a correction. Adding a further word of caution, he says, “If the rupee appreciates, both tech and pharma will be sectors to avoid, but if the rupee stays either stable or depreciates marginally, tech and pharma will become reasonably attractive. Having said that, we do not believe there is a material undervaluation in any large cap tech or pharma stock at this point of time.”
“Export oriented companies have a very good opportunity to perform from here onwards because of two factors. First is that depreciation of the Indian currency has made Indian companies competitive. If we remove sector specific competition from other countries, the large competitor for India is China, and with the appreciation of the Renminbi, the competitive advantage has narrowed,” says Sachin Shah, fund manager at Emkay Investment Managers. He also mentioned that clients have started looking at the country specific concentration risk, hence many companies would be coming to India, which put together will bode well for the export industry.
Lalit Thakkar, Managing Director - Institution, Angel Broking believes that the IT and Pharma provide structural upside due to a weak currency and strong cash flow combined with reasonable valuations. He says, “Sector rotation always creates opportunity. FMCG requires a more opportunistic strategy as it will provide short term spurts when accumulated on declines.”
He further added that infrastructure sector along with PSU banks are challenging as the economy is not turning around at the same pace as the improvement in their valuations warrant. Besides many structural issues in these sectors will take time to be resolved which is not being factored by investors.
Adding perspective to the argument, Vinay Kumar Agrawal, Equity Research Analyst, WealthRays Securities says, “Equity Markets around the world have been very volatile in the recent months due to various economic data released and policy decisions taken. Geopolitical environment has also not been stable and tensions in various part of the world is having a direct impact on Equity Markets.” During such a scenario sectors like Energy and Banking are the ones most affected by this volatility and Investors are losing confidence in these sectors and they are taking profits even for small movements which add more market risk for these sectors. If this global scenario continues, more money can be expected to flow into defensive sectors like Pharmaceuticals and FMCG.
Meanwhile, Rakesh Tarway, VP and Head of Equity Strategy, Equity and Derivative Products, Motilal Oswal Securities points, “Yes, they have been contrarian for some time now. During the last one month as the market is consolidating in a range, CNX FMCG and CNX IT have recorded positive gains and have outperformed NIFTY by 5% and 4% respectively.”
Investment Opportunities
“We believe that the real contrarian investing at this point of time is seen in long duration fixed income which is attractive on a valuation basis,” says Naren ICICI Prudential AMC.
Any long term investor should have a diversified portfolio. Tarway of Motilal Oswal says, “After a rally of close to 50-100% in cyclical, it is all the more prudent to increase weight in defensives like IT and FMCG.”
But good opportunities can also be found in other sectors as Anand Shah, Associate Director, BNP Paribas, says, "If I were to look at a sector where the fundamental is good and there has not been a run up then I would say 'telecom' and the other one is cement. In these two sectors I believe there is some value left."
"Now you need to buy into companies that can deliver on expectations. And from this aspect we think that there could be a good case in the private sector banks, auto ancillary and in some textile. In the immediate anything can happen but over a longer period of time these pockets will make money for investors," says Anand Shah.
Meanwhile, Sachin Shah of Emkay believes that currently there are stock level opportunities, there is no sector as a whole that is undervalued. Giving an example, he says, look at IT sector, the valuation is reasonable but the business has become more commoditized. The threat is not from any country, it is now more about how IT companies add meaningful value to the service they are providing. So the companies that bring innovation will show better earnings growth.
Stock Picks
“Infosys and Wipro among large caps are attractively placed” says Thakkar of Angel Broking. He points out that both companies are going through a transition making it possible for them to capitalize on productivity improvements. “As the economy and sentiment improve in US and Euro along with a supportive domestic currency and attractive valuations at 15x FY15E earnings, they provide a good risk-return trade-off,” says Thakkar.
TCS had shown better results than its peers this quarter and had outperformed the industry growth. Agarwal of WealthRays Securities says, “It is expected to grow at higher rates and eventually the stock could be seen trading around 2800 levels. Any depreciation in Rupee will benefit the company in near terms.”
Among the FMCG sector, ITC is a steady stock. It is trading at lower multiples as compared to its peers currently. “Increments in cigarette prices is expected to adversely affect volume growth but ITC plans to enter businesses like dairy and beverages reducing its dependency on cigarette business income. Though food inflation and delayed monsoon will affect its profitability. But as compared to other sectors, inflow is likely to continue into defensives as global volatility continues,” says Agarwal.
Meanwhile, Agarwal recommends Lupin in the Pharma space. His rationale is that in coming near term, the market is expected to show a downward move led by the mid cap and small cap stocks in sectors such as auto etc. Hence, heavyweight Nifty stock such as Lupin would be one of the major attraction of the investors for investments in Pharma sector.
P.S. This is the submission draft. The actual story had appeared in October issue of Money Today. You can read the final version. Click here or copy paste the given below link - http://businesstoday.intoday.in/story/contrarian-investor-stocks-infosys-wipro-tcs-itc-it-fmcg/1/210978.html
