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    Is this a good time to lap up liquor stocks? Dipan Mehta explains

    Synopsis

    ‘Remember that liquor stocks are extremely richly valued’

    Dipan Mehta-1200ETMarkets.com
    There are better ideas in the market to buy at this point of time than expensive stocks like United Spirits.
    Margin of safety is not there for a whole host of consumption-related stocks, says Founder & Director, Elixir Equities.

    Would you be a buyer in liquor stocks? This is one space where we have realised that the consumption patterns have not changed.
    No, I do not think so. Till we do not have the parties and functions or the other entertainment going in terms of restaurants and pubs, I think consumption will remain lowkey. Although we are seeing the queues in front of liquor shops, it does not necessarily mean that sales are back to normal levels. It will take a while for normalcy to return and a lot of the growth was coming on account of causal drinking, which will not happen at home. So I am not that positive on liquor stocks unless we have handled this Covid-19 pandemic.

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    Another thing to add is that the stocks are extremely richly valued. They are seen as a good play on consumption patterns, seen as a good play on rising spending but given the kind of valuation they are trading at, I will be a bit cautious. United Spirits and United Breweries may have many quarters where growth may be flat on a year-on-year basis. So I am a bit sceptical over here. At the same time I think competition is increasing for United Spirits. So I would be a bit sanguine and just wait and watch. There are better ideas in the market to buy at this point of time than expensive stocks like United Spirits.

    A lot of companies are clearly indicating that demand either is back to pre-Covid levels or it will be back to pre-Covid levels sooner than they anticipated say a month ago. How should one read into that?
    You and I have been following management for the last few decades or so and never has a management come along and given a pessimistic view of their business. So I would take all the optimism with a pinch of a salt. There is no doubt they are seeing normalcy coming back and a lot of it could be due to pent-up demand. For the last three months, people have been locked down and they postponed their purchases. All those are getting clubbed together and showing up in their numbers at this point of time.

    There is no denying that this is a massive economic setback for many consumers, be it on the companies side or at the individual level and I would be very-very cautious about the consumption spends going forward also. So from that point of view, although they are seeing normal states, there is no denying the fact that once this pent-up demand is over and done with, what is the kind of actual level of consumer spending needs to be seen. That is something which neither the management nor analysts like us have a handle on.

    At the same time, I need to keep on adding this fact that if these consumption-related companies are available at price to earnings growth of about 2-2.5-3 times, it is still understandable and it makes long-term sense to buy into these companies. But Titan, United Spirits, Page Industries can grow at 10-12% and their PE multiple trailing 12 months is 50 times plus. So these are PEs of 5 times and PEs are unsustainable even in normal times. With so much uncertainty, you would prefer to buy into companies where there is a little bit of margin of safety. What happens if you have a couple of bad quarters in such companies on account of recurrence of the pandemic and further lockdowns and what happens if there is a complete collapse of consumer spending because of declining wealth effect? So these are things which we do not have a handle on.

    So if the stock is trading at a reasonable market value, you want to take a chance and take a three-year view. In terms of that these are secular growth stories and eventually earnings will come back but for that you need a margin of safety which is not there for a whole host of consumption-related stocks. So I will be a bit sceptical buying into such high PE companies. No doubt they are great companies, have fabulous track records but they are not necessarily great investments at this point of time.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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