What should investors do with RIL and ITC? Amnish Aggarwal answers

"And some of the stocks or the sectors which are currently in limelight including, you can say, cap goods, defence, PSUs, I think they can look at some sort of a moderation if there is some negative surprise in the elections," says Amnish Aggarwal, Prabhudas Lilladher.

What is your estimate right now ahead of elections? How are you suggesting your clients to position their portfolios, etc? Any fresh recommendations on the buy side or any change in your overall upgrades, downgrades?
Elections is a very important event and we are now just I think three trading days away from it. We had issued a note to our clients in which we had identified a few sectors and the scripts which would be doing well irrespective of the outcome of elections.

So, our view is that in the current context we had increased actually the weights behind FMCG and auto, these two segments, where because the monsoons are going to be good, the recovery is going to be there and these stocks are like a hedge whatever may be the outcome of elections.

And some of the stocks or the sectors which are currently in limelight including, you can say, cap goods, defence, PSUs, I think they can look at some sort of a moderation if there is some negative surprise in the elections.

What about pharmaceuticals in particular and I would throw in chemicals as well in there, does it seem like a turnaround could be at play while pharma earnings have very much been reflecting that selectively albeit, do you think the same could happen with chemicals too?
Both these sectors are actually not comparable because if you look at, say, pharma, the pharma actually had generic pricing pressure that abated couple of quarters back and many of these companies they were having, you can say, many of these new launches were there which powered their growth and it has been happening from past, say, at least two to three quarters, due to which if you look at all the major pharma stocks ranging from, say, your Cipla, Sun, Torrent, so all the major pharma stocks, they have run up quite a bit in the last six months or so.

So, pharma pack I think going forward also unless and until there is something very big negative which comes in terms of, say, pricing in US or the domestic demand, it should continue to give you secular returns even from here on.

Now, coming to chemicals, I think the story is slightly different because the chemical pricing was too much, you can say, depressed, due to which the profitability came off.

Now, if you look at the current quarter numbers in particular, on a YoY basis the companies continue to be under significant pressure, but if you look at it on a QoQ basis, you will see that the QoQ performance as well as margins that they have shown improvement in most of the companies and which have been reflected and clean the stock price of many of the companies because the stock prices have also shown a smart up move.

Going forward, we believe that a lot will depend upon how the pricing in the global markets particularly plays out and how you can say the pricing and the overall push of the chemicals in the global market from China happens, where everything is a function of what happened on the China on that front.

What is the view on real estate right now because Brigade and Prestige Enterprises came out with earnings yesterday, for both of them it was a very good set coming in, but now the jury is out whether we have peaked out on the cycle or not?
The pre-sales have been very strong across territories. But I believe that a lot of these pre-sales are also happening on the back of investment buying in the real estate, so which means that there could be some question marks on the longevity of this cycle.

While I think maybe another, say, few quarters, the cycle may continue, but somehow the actual demand has to replace the investment buying which is happening in the top few cities as far as your demand is concerned.

So, maybe, I think a couple of quarters, maybe a few quarters are left but one needs to be very cautious in entering the real estate stocks now because the stocks have run up very sharply and if these pre-sale numbers result in any increase in the inventory at the investor level or at the company's levels a few quarters down the line, then there could be some correction in the stock prices of all the companies.

At what point in time markets would say that, look, the risk-reward ratio lies in looking on the other side, which is you revisit, let us say, banks, you revisit FMCG or consumer discretionary. At what time do you think it is time to change? What would be the time to change that gear?
See, we have already started recommending some sort of a shift towards some of the sectors which you mentioned, whether it is, you can say, FMCG, durables, pharma, banking, etc, and the reason being that all the stocks whether it is defence, whether it is cap goods or some of these infra names, they are doing well.

But having said that, if you look at the multiples of many of these stocks, whether it is an HAL or many of these counters, so today they are trading anywhere between 40 to 50 times. Long-term growth outlook is good. But can they continue growing at 30-40%?
The answer is no. So, my sense is that if we get the continuity of government, then maybe we can have a small rally and after that once the dust settles, we will see some new sectors emerging, which will take the markets from here on.

But having said that, all these defensive sectors, whether it is FMCG, whether it is pharma, IT, banking, in a very secular state they cannot grow by more than, say, 10% to 15%, so that is actually what has resulted in some of these defence and other themes coming into play.

So, we already have started witnessing some sort of a shift from some of these so-called hot stocks to some of these defensives and I think the shift will not be very abrupt, it will be gradual, but I believe it has already started playing out a little bit.

I wanted your view regarding a couple of other stocks and the heavyweights at that, Reliance and ITC, what is your view on both of them because ITC, of course, has been sideways and I am talking about only very-very immediate term. But there is this overhang and murmurs around whether the hotel demerger will go ahead or not but a couple of agencies asking people to vote against it as well. What is your view on ITC and the entire rural recovery theme?
ITC, first of all, if you look at the SOTP valuations, hotels is not more than Rs 10-12. If you can stretch, maybe Rs 15. So, whether the demerger goes through or not will not have a very significant impact on the stock price of ITC that is one.

Secondly, if you look, before the announcement of demerger the stock at once went to even 480, 490 as the markets were too enthused on the demerger of hotels, so I will not purely go by what happens on the demerger front.

Now, coming on the rural theme, I think ITC, if you look, it is not predominantly a rural story. For example, you look at paper and paper boards, you look at their FMCG which is not purely mass-mass. You look at cigarettes. I would say it caters to all strata, but it is not purely a rural story. But having said that, the kind of growth the company has shown in the last couple of years, now it is facing some sort of headwinds, whether it is the increase in the leaf tobacco prices, which is the raw material for cigarettes, whether it is the soft paper prices. However, given the current situation, I think in some of these divisions, particularly agri, paper, etc, the turnaround may be a couple of quarters down the line.

Cigarette already, the volumes are in the positive territory. But now, ITC is not in a zone where it can give you 15-20% profit growth. The more rational expectation should be something like 8% to 10% PAT CAGR for the next one or two years.

So, the stock is consolidating and I believe if there are no big jitters which come in the budget, maybe which will happen in the month of July or so, then we can expect the stock to give, say, 10% to 15% return from here on, but the climb from here on will be very gradual.

Now, coming to your second stock, Reliance, I think, again, this stock is also consolidating because the company is moving, I would not say away, but it is moving into new generation businesses, which centred around, say, hydrogen, new energy, and all the stuff around that.

Now, what actually happens is that today, market is not able to ascribe any value because of whether it is lack of information, whether it is the fact that these are at a very nascent stage.

I think I do not rule out that a situation like what happened in case of your retail or Jio a few years back might also happen in some of these businesses.

So, now if you look at the way they want to set up, say, your one lakh megawatt under the renewables or the hydrogen and things like that, I think once the markets get more view and clarity on those and once they start ascribing value to it, I think there will be enough scope in the Reliance to make money.

So, I think it is a very good level and if the stock corrects a little bit, I think these are good levels to accumulate Reliance, but one will have to be slightly patient with the stock.

I want to go back to your old favourite. Can you guess which one? Have you forgotten FMCG, your old favourite?
There are many favourites in FMCG.

But this time, the volume growth is looking better. I am keeping HUL aside, but the confidence from Marico, Britannia, even Dabur things are looking up now. Is there a trade coming in FMCG?
That is what exactly I said a few minutes back, that the volume growths have bottomed out, that is one. The second being that we are going to have normal monsoons. So, now the combined effect of these two is going to be positive for the sector.

Now, if I add a little bit of input from elections, now if the current government continues, even then I expect more allocation for the rural sectors, farming sector, etc, which should be positive.

In case if the other, if INDIA Alliance comes, then the kind of dole outs which there suggesting for the rural, for the bottom end, I think this sector is just going to fly away.

So, I think it is in a very good situation. Yes, as of now, the visibility on the growth is not high that they will start growing at 15-20%, but some of the stocks whether it is Britannia, whether it is HUL, whether it is Marico, some of these stocks are looking good.

They have done well. But unfortunately, given the fact that they never turned very cheap even during the last one or two years and whatever scope was there, the market has reacted very fast. So, one cannot say that your appreciation is going to be very sharp, but definitely, they are in a zone that one can look at them, but with moderate return expectations.