Sectoral rotation on, go for a balanced portfolio

FMCG is not going to be a laggard for a longer time. It would again start participating in the rally or may even lead the market, says Devang Mehta, says Devang Mehta, Head-- Equity Advisory, Centrum India.

We saw a fabulous move in M&M yesterday. What could be driving the markets with so much optimism?
M&M yesterday was driven more by the news that the loss-making businesses would be shut down and a lot of re-integration would happen into the business and the focus coming into where they are strong getting stronger could probably rerate the stock for some time to come.

The business went through a lot of turbulent times over the last two years not only because of the automobile cycle getting slowed down but also that a lot of businesses were bleeding. This seems to be a welcome move from the management and the markets have given it a thumbs up. But having said that, we still feel that a lot of demand which came during the festive season was more of pent up demand. It is not quite sustainable over the next two, three months. Of course, time will tell that but auto shares have gone through a very difficult and a rough patch. This is more of a laggard rally which we are seeing in a lot of such stocks. I do not see the fortunes changing for these companies immediately. But a bit of rerating and extended buying could be expected.

What is the outlook on RIL?
It has been in the news since the last four, five months and a lot of deals rerated the stock and a lot of investor interest was seen from FIIs and DIIs. All the marquee investors who took a stake in Reliance Jio and Reliance Retail are here for the longer haul. So I do not think there is going to be much of a problem.
Of course, the move was a little too swift for people to digest and it is just taking a sort of a breather and of course the oil and gas business was a little bit of a drag when the results came out. We are seeing sector rotation and stock rotation. Over the last two, three months, we have seen all cyclicals coming back. Laggards like banks have shown a great move in the last one month. It is more or less sector rotation which is happening again. It is more of a breather and for people who were left out, they would again reconsider entering it at lower levels.

Yesterday, the FMCG index had it fairly rough and that can largely be attributed to the drop that we saw in HUL. What is the road ahead for HUL?
HUL plus all the FMCG companies had also seen a breather or a sort of a rally which discontinued in the last one month. FMCG companies like Nestle, Britannia, all these companies, some of them came up with great numbers in terms of even volume growth and margin expansion. The future ahead is extremely bright for the essentials in this difficult environment as the market breadth has got a little thicker with a lot of businesses participating.

These companies trade at an expensive price to earnings ratio and they have deserved this over the last five to 10 years and they get from expensive to be a little more expensive. There is a lot of investor interest in these types of businesses where you get stability, a good night sleep and peaceful returns. I do not think FMCG is going to be a laggard for a longer time. It would again start participating in the rally or in fact lead probably when there is turbulence in the market. HUL, Nestle, Britannia could come to the fore and do well once this high beta type of a rally breaks down or at least stops.

What is your view on some of the metal majors? Would you stick to the frontline names; Tata Steel, JSW, SAIL?
We have always generally stayed away from metals and as such global cyclicals and Indian cyclicals as well. And the reason is that whatever is a structural move in terms of a lot of sectors available right now at decent valuations, they would tend to give you a multi-year rally. Cyclicals like Tata Steel would depend more on the China situation or how the global world emerges out of this crisis. There is an opportunity over there for sure, the debt reduction, the plans which the company had announced there could be some bit of a rerating which can happen because the stock has underperformed for a long-long time. So it would be more of a technical buy for people who would probably deal into cyclicals but purely as a portfolio stock we would not recommend Tata Steel because it is going to be extremely difficult to time the moves of cyclical businesses.

If somebody wants these types of businesses which can see a lot of traction something like a building materials or cement would qualify as a much better play than steel or metal which comes with a load of debt in difficult times which is difficult to sort of sustain or cut those interest costs to sustain. We would prefer something like cement than steel.

ET Now: What is your view on the theme of contra buy in aviation, tourism, hospitality, multiplex?
Devang Mehta: The prices already have sort of shot up in anticipation of the economic recovery being just round the corner and also the unlock trade which supposedly had started three, four months back. But multiplex theatres are still vacant though the cinema halls have opened up. One needs to focus on a balanced type of a portfolio. If one wants to play the economic recovery theme, it should be played via private banks, good private banks, a mix of retail as well as corporate lenders which would serve the purpose a little better than trying to gauge the economic recovery which will or may not come.

We are seeing a second wave of Covid coming across the globe, particularly US and Europe. If this comes after the festive season in India, trade again would go for a toss. We are in for a more balanced type of a portfolio. One part of the portfolio has to be FMCG, IT, great MNC pharma names, niche pharma names and the second side can be banks, insurance companies and companies which also would be beneficiaries of economic recovery rather than being in the aviation sector.

People will be sceptical about travel for the next 6-9 months. We all are regular travellers but I have stopped travelling since the last nine months. So, travel will come back in six months to one year’s time hopefully once this settles down but there will be better levels to enter this type of business. A lot of these businesses have come near pre Covid levels or are 15-20% just away from those levels. I do not see the margin of safety over there.