Why do liquor and tobacco stocks have a divergent trend? Anand Tandon answers

Anand Tandon, Independent Analyst, says “on the consumption side, if you were to look at consumer durables, it is time to look at the not so favoured two-wheelers, etc. Bajaj has done very well. Hero still has to move. It is still trading at giving a dividend yield upwards of 4.5-5%. They are bringing in new motorcycles and so on. That is also another area which from a discretionary point of view, could be something that could do quite well.”

Why do liquor stocks and tobacco stocks have a divergent trend? It has always happened in the past.
Well, I have not tracked them together to see what happens but ITC is a company which is investing in two areas in a big way – FMCG and hotels. Frankly, both of those have now reached sizes where they should be generating serious profits. I mean, if you are not making money in hotels today, when will you ever make money?

FMCG also, had over Rs 10,000 crore of sales. They should be making serious amounts of profit coming forward from there. So the real trigger in ITC now will be to see if they actually live up to their promise of separating out these businesses and floating them separately.

I do not believe that there is any major funding requirement. And even if it is, ITC has enough cash flow to pass on to any of those companies and set them off. That would certainly unlock a lot of value from here on.

For United Spirits, the biggest problem is the way that the distribution works, I mean, clearly, because each of the states have their own policies and by and large, some of the largest consumer states have a policy whereby they pick and choose what they want to sell and you are a monopoly buyer effectively. A lot of give and take happens between the company and the government and that automatically constrains the kind of distribution margins that you can make. If the market was to really open up, United Spirits will also do exceedingly well but right now. They are doing okay in terms of trying to see if they can move off the curve in terms of the product base and get out of some of the lower margin products and so on. But it is clearly not the same kind of market space that an ITC is.

Which is that one sweet spot of yours in terms of buying a consumption space? Some people say we like Ethios, a watch company. Some like Landmark, it is into luxury. We have had folks who have said we like Bikaji because it is simple. Indians will consume more Farsan, more Bhujiya as they evolve. What do you think would be a nice good consumption idea for the next three years?
You have to keep watching because most of the FMCG companies do not trade cheap. It is also a question of what kind of portfolio you are looking at. For the moment, I would think that you are betting mostly on rural areas. I would imagine that in the next one year, you will see a lot of money going into the rural economy and that should boost consumption so most staples, etc, will do reasonably well.

On the consumption side, if you were to look at consumer durables, I would think that it is time to look at the not so favoured two-wheelers, etc. Bajaj has done very well. Hero still has to move. It is still trading at giving a dividend yield upwards of 4.5-5%. They are bringing in new motorcycles and so on. That is also another area which from a discretionary point of view, could be something that could do quite well.