Hold consumption-related stocks for long term
Hope of a favourable monsoon that could keep inflation under check and nudge the Reserve Bank of India (RBI) to lower interest rates; and the excess cash in the hands of government employees on the back of 7th Pay Commission recommendations has seen investors flock to consumption related stocks since March 2016 when the overall sentiment started to improve.
The Nifty India Consumption index - a gauge of the behaviour and performance of a diversified portfolio of companies representing the domestic consumption sector that includes sectors like consumer non-durables, healthcare, auto, telecom services, pharmaceuticals, hotels, media & entertainment, etc - has performed in-line with the markets, rising nearly 26%. The Nifty 50 index, too, gained ground at a similar pace.
However, a lot of stocks within the consumption space have gained much more. Zee Entertainment, Asian Paints, Page Industries, Hero MotoCorp, ITC, Britannia and Marico, for instance, are close to their respective 52-week highs; and have risen 25 - 50% since March. Others such as Maruti Suzuki, SUN TV Network and Havells India have rallied 50 - 72% during this period.
So does the rally in consumption-related stocks have more steam left, and how should you play these stocks now given the rise?
Going ahead, analysts now expect earnings to become increasingly relevant given that the stocks have rallied on positive sentiment and the gush of liquidity. Macro factors, they suggest, have already led to a large re-rating in most counters.
"We expect the market's focus to shift increasingly to earnings and fundamentals as the scope for re-rating of multiples is quite limited. Domestic positive events such as 7th Pay Commission's implementation, good monsoons and decline in interest rates have partly played out but are largely priced in," says senior executive director and co-head, Kotak Institutional Equities in a co-authored report with Sunita Baldawa.
Despite the run-up, analysts remain bullish on these stocks and suggest investors continue to stay put at least for the next two - three years in stocks of fundamentally sound companies that have earnings visibility.
"Consumption is an on-going theme in India with a huge customer base. The hope of a rate cut and 7th Pay Commission recommendations have just accelerated this theme. Having said that, one cannot paint the entire consumption theme with one brush. We are in a phenomenal bull market, and investors need to be careful where they invest. I believe these stocks can be at much higher levels in the coming years," said Jagannadham Thunuguntla, head of fundamental research at Karvy.
A good monsoon and improved sowing is likely to result in better harvest and increased rural income going ahead, analysts say. With the implementation of the seventh pay commission recommendations, they expect consumer durables, two-wheelers, passenger cars, home improvement companies - including paints, tiles, plywood etc - to witness an increased off-take in the second half of FY17. The FMCG companies are the next sector that should benefit from a consumption pick up.
On a relative basis, analysts at Prabhudas Lilladher expect the FMCG sector to outperform going ahead.
"We see stocks like Britannia Industries, Pidilite Industries, Hindustan Unilever (HUL) and paint companies as stocks that have a strong growth momentum over the next few years. These are companies with free cash-flow, and the stocks need to be looked from a three-year perspective rather than the next twelve months. On Britannia, for instance, we see a price of Rs 3,800 in 18 - 24 months," says R Sreesankar, co-head for institutional equities at Prabhudas Lilladher.