It’s time to move away from momentum and look at some of the corrected stocks: Kunj Bansal

Kunj Bansal, Investment-illiteracy.com, says “in the first round of investments, FIIs always look for quality names and which is where FMCG comes in, net cash flow companies having existing cash, high brands, high distribution and that is where we have seen the buying interest coming in in the FMCG. On an intermittent basis, we can continue to see that. But in this kind of market, one should probably move away from the momentum and look at some of the corrected stocks where the pricing trend, the quarterly number trend seems to be an improvement. From that angle, the cement sector is something that comes to mind.”

What is your take regarding the entire FMCG basket? Britannia, ITC are at all-time highs. What are the best names to play this theme?
When the market has been moving up, we are seeing participation from multiple sectors and by rotation there will always be some outperformers and some underperformers. In terms of outperformers, FMCG has been one, auto has been the other. The underperformers have been metals. Within FMCG, the result numbers have not really been very encouraging, which was on the expected lines. There was no expectation of a great volume or revenue growth coming in and to that extent the results have been subdued.

But yes, the market is seeing a lot of money coming in, especially the global inflows that have started. In the first round of investments, they alway look for quality names and which is where FMCG comes in, net cash flow companies having existing cash, high brands, high distribution and that is where we have seen the buying interest coming in in the FMCG.

On an intermittent basis, we can continue to see that. But in this kind of market, one should probably move away from the momentum and look at some of the corrected stocks where the pricing trend, the quarterly number trend seems to be an improvement. From that angle, the cement sector is something that comes to mind and there are some signs of performance improving both in terms of the volume growth as well as margins and the prices have not moved as much for the stocks.

In this entire market, recovery wise Reliance has not participated?
Yes, I wish I had answers to such simple questions. Whenever markets move, there are a lot of stocks which go through. Typically, there is a life cycle on a longer term, in terms of pricing or in terms of valuation for the sectors as well as for individual stocks. So, there will be stocks which will have a long consolidation or underperformance and they will come out of that either by improved financial numbers or by sudden noticing of the market or by lack of availability of other stocks at a reasonably financial number.

They will have a sudden interest coming in in the market and we will see sudden sharp outperformance. After such a sudden sharp outperformance which may happen in one year, two years or three years, again a consolidation phase comes in. As I said, I do not have a specific answer and neither do I think

It is just a coincidence that every auto company also goes through its unique cyclicality. There was a time when Maruti was the numero uno. The last 12-18 months have been dominated by TVS and Mahindra & Mahindra. Will the next 18 months be dominated by Tata Motors, Mahindra or by Maruti?
The auto industry itself is cyclical in the first place but when I say that I am talking of the industry as a whole, what you said is about the individual companies. That is quite likely. We know by now having been in the market for close to three decades that managements keep reinventing themselves and keep looking at newer ways to increase market share along with profitability and along with cash flows.

For that, they have to do a lot of things in case of automobile they have to first of all specifically look at introducing new models then of course make sure that the new models are success by way of innovative marketing and by way of routine marketing as well and then make sure that there are collections, there is a pricing power and things like that.

Now it has happened for different companies and actually that is a very good thing because the customer has had a choice and as a result, individual companies also had a phase of one year, one and a half year, nine months distributed amongst various companies to make money. Each company has been able to come out with some innovative models at some point of time. Another one came out with some different models at different points of time and then of course there were some industry headwinds and tailwinds.

Till about six months ago, we had headwinds in terms of the metals prices remaining high and now metal prices have started to correct the high raw material prices inventory has slowly got over. Little bit of pricing power was an issue, interest rates were going up, financing was an issue but now RBI has paused interest rates, 10 year G-Secs have come below 7%, I do not know if that is an indication that not in immediate future but let us say six or nine months down will we start seeing the interest rate coming down so that is what will again act as a tailwind to the industry.

Amongst biggest headwinds have been the crude prices which have continued to result in high petrol prices in India. These have been factors and it has been to the ingenuity of individual companies that they have been able to try and find success formulas within this overcrowded space.

It is now almost like a folk story that the Indian hotel industry is doing very well. This year is going to be a year when hotels will make more money. Markets know that and markets have re-priced some of these stocks. A stock like Indian Hotels is up six times or six and a half times from the Covid low. How do you value a franchise like Indian Hotels? Would you be happy to keep the stock for another year, year and a half to two years?
Let us look at some background. If we leave aside the period post Covid in terms of industry performance, before Covid, quite a lot of hotel companies are making good money depending on the economic cycle. Their pricing was really high and so was their occupancy rates and as a result the profitability. If we look at a reasonably long period of 5, 10, 15 years before Covid, somehow the market never gave valuation to the hotel industry.

In my view, one of the reasons was the lower return ratios that these companies had lower return on equity, lower return on capital and things like. Now partly as a result of Covid wherein the issues came, partly in any case this discussion and understanding was going on, these companies have realized that they need to make higher return on capital, higher return on equity at least cover the cost of capital and they have changed the model from owning the properties to leasing the properties.

So along with the business rise, market is rewarded due to the improvement in return ratios. To answer your question, yes, because of the basic change in the business model, the market could continue to reward although a lot of valuation, a lot of front-ended growth has already been built in into the current price and the current valuation. but still there is a possibility.