Kunj Bansal on what to do with FMCG, steel and defence stocks now

"For temporary or short term, steel stocks will continue to be a trading bet for medium term investors. They can hold back for some time and not look at really investing aggressively in the metal space," says Kunj Bansal, Founder, Investment-illiteracy.com.

The defence pack has been gaining ground. The Mazagon Dock is up 13%, Garden Reach has suddenly surged 8%, Cochin Shipyard is up around 7%, Hindustan Aeronautics has been having a good day and is sitting at a 52-week high level as well. For most of us who have missed out on the defence trade, is it still a good buy?
It is always difficult to answer such questions but let us put a few things in perspective; one of course, leaving aside today’s sharp rise which has come again in the last one week, 10 days or so, all these stocks had given a reasonably correction in terms of price anywhere in the range of 5-10% from its previous high.

So for the short-term traders., that was a good opportunity to enter. Now of course it depends how the market momentum remains and whether the buying in these sectors and these stocks continue. Let me also add here that the whole PSU space has been outperforming the market for almost six quarters now. Initially it started with all the old companies which used to be performing well and have started to do well, moved recently into all these new defence shipping and aeronautics related space.

The reason for that has been the continuous government support that has come in for these companies; one in terms of policy support and two in terms of the actual buying orders that the government and various agencies and various departments and divisions of the government has placed on these companies to source the products and services from.

So that is a big support and in addition, the government has asked them to go and market their products and services in foreign markets as well. Obviously, when we say that, the underlying thing is that the government will give them tacit support, using diplomatic channels and things like that. But at least these companies that produce goods and services which are competitive and far superior to any other technology in the world, should go and market.

As a result, the export market has also picked up for these companies. Any medium term investor can invest in these companies on any correction, One has to keep in mind that two years down the line we have elections and depending on the new government formation, the new policies will always be a trigger on the government companies. But the expectation is that this kind of fundamental improvement that has taken place in these companies will continue irrespective of the government change that happens. In any case two years are still left for that and pending that we could have a good return.

We did have the news coming in with respect to the export duty on steel and iron ore being removed. While there was mild fillip in the stocks, that fizzled out by the time the trading day wrapped up. What is your view on this news and how are you looking at the entire domestic metals sector?
That was the news or announcement which came from the government and was expected. Of course the government had imposed the duty earlier to curb the domestic steel prices in its effort to control the overall inflation. That seems to have worked and it was high time that the government took that measure back so that the industry can again become competitive in the export market.

So that was a positive news but the important thing is that on that news, the stock prices received a one-day fillip but the global commodity prices, mainly the steel prices are now not rising as much as they were two quarters ago. In fact, they are correcting or remaining in a range bound movement.

That has already reflected in the financials of the steel companies for the September quarter wherein we saw significant drop in the profitability. Something like that could continue going forward as well in December quarter as well and that is where the disinterest of the market in these stocks as of now. So for temporary or short term, steel stocks will continue to be a trading bet for medium term investors. They can hold back for some time and not look at really investing aggressively in the metal space.

What is the outlook based on the HUL commentary on the entire FMCG basket?
If I were to take key takeaways from that, it will be an effort by the company to continue to gain the market share in an industry which is well entrenched. The penetration is now no more a point for the whole industry, not only HUL. It is how much the new product launches that they keep doing and as a result the overall volumes keep growing.

The important point to note is that over the last seven eight years or so, the company has improved its EBITDA margin by almost 10 percentage points so that is a significant improvement. In the last one quarter, we have seen the raw material prices affecting the margins of the whole industry and for HUL also that is something that sequentially we might see improvement because palm oil prices have corrected and some other commodity prices have corrected although milk prices continue to go up.

Chemical prices have also corrected so we could see some improvement. So HUL will always be a stock for the long term portfolio of investors. It is not going to give 30-35% or multi bagger kind of returns but will provide stability in the volatility of the market, in the downturn of the market and in the rise of the market, it will give consistent returns of 10-15% per year CAGR over a long period of time, outperforming the market returns or outperforming the general inflation trend and almost outperforming the GDP growth rate twice over.