Is it time to add FMCG stocks to your portfolio? Varun Lohchab answers

However, as a tactical play, what we are recommending to clients is consumer discretionary, which was basically a play on urban demand categories like apparel, footwear, and QSR, structurally we are still positive on consumer discretionary, the valuations out there are really stretched and urban demand while it will remain strong, you will be up against high base next year," said Varun Lohchab, HDFC Securities. Edited excerpts:

ET Now: I wanted to understand how the market is waking up to the NBFC opportunity in trade, be it in cash, or F&O, and that pocket has been very vibrant. How do you see the valuation metrics of this universe, particularly some of the non-PSU, promoted NBFCs be it retail, housing or any other affordable housing or any other how do you see the valuations here?
So I think overall valuations in NBFCs are fairly attractive. They have undergone a fair bit of derating in the last 2-3 years, ever since the IL&FS saga and several names are now trading at reasonable valuations 1-1.2 times price to book. Obviously, Bajaj Finance is at the six to seven times sort of a price to book but barring that, most of the other NBFCs' valuations are not a concern.
I think the reason why they were underperforming banks in the last 3-6 months is mainly because of the rising interest rates, obviously, banks benefit, whereas NBFCs have to take wholesale deposits where the rates were going up.

Credit growth of NBFCs should be good and should pick up and would be largely in sync with banks. A lot of these NBFCs also cater to the lower income strata, and that is where the pain of Covid was higher, and that was another reason why some of them were struggling in terms of either credit growth or collection efficiencies but I think things are incrementally getting better, valuations are reasonable so, we are constructive on few of these NBFCs as well while overall we are more positive on banks and we are still overweight banks, but some of the NBFCs can be looked at, some of the rural exposed NBFCs names like M&M Financial or Shriram Transport Finance we do cover some of them and we have positive ratings on some of these NBFCs.

ET Now: Are you playing the infra theme via ancillaries? Cement, pipes and all of that or are you sticking to only road construction or EPC construction in the infra space and what are your top picks here?
We are not restricting ourselves to only EPC, while we do have a few buy ideas in the construction and EPC space. I think cement clearly would be a beneficiary of the whole infra spending, cement is also among our preferred sector names, like UltraTech, and Dalmia are our top picks out there. In the construction space we have L&T and NCC as our top picks. From the capital goods space, we have Cummins.

We believe that would be a beneficiary of the capex as it percolates down to the smaller players. So we believe real estate and building materials also have a fairly strong runway of growth. Building materials as a sector has really widened in terms of opportunities, which are there across multiple sub-segments, so building materials has seen a very sharp margin contraction in the last three to six months, leading to muted stock price performance. We believe that will get better in the second half as the cost pressures recede, so building materials definitely is again our preferred area and real estate developers again sort of infra theme.

ETNOW: Do you think it is a good time to add to these FMCG companies, and from here on sequentially the numbers performances will start improving?
The performance will definitely get better because if not the demand side, if I have to break up that question into two parts. On the demand side, we have still not seen clear signs of rural revival. I think it is still early days to say that rural demand has really improved, but I think it looks that next year, which is calendar year 2023, should be definitely better than what 2022 was from a rural demand perspective, how much better we need to see. I think the point which will definitely come through would be the margin side.

We will have a high base in the second half in terms of the raw material cost, so YoY, things will start looking better on the margin front. So staples valuations again are not a big concern now as it was a couple of years back when relative to market they were really expensive but I would say that FMCG is somewhere in the middle. We have a neutral kind of call. It is not too compelling on valuations.

It is not too compelling for growth. However, as a tactical play, what we are recommending to clients is consumer discretionary, which was basically a play on urban demand categories like apparel, footwear, and QSR, structurally we are still positive on consumer discretionary, the valuations out there are really stretched and urban demand while it will remain strong, you will be up against high base next year. So, it will be a reverse of FMCG in some sense, so we are advising some tactical move away from consumer discretionary into FMCG, but on its own, I think it is more like a neutral sector, and we need to watch out for rural recovery. If that indeed happens, then we will become even more constructive on FMCG.