Is it the right time to buy consumer stocks? Ajay Srivastava answers

“We are in a much better shape to reinvest but be cognisant that these are high PE multiple stocks therefore the returns possibly could lag the market at this point of time. But safety is there that they have bitten the bullet and government policies are now running in tandem with consumption, says Ajay Srivastava, CEO, Dimensions Corporate Finance Services.

It had looked like a gloom and doom and suddenly everybody is saying that the bottom is in place. Are you supporting the market?
I am invested in the market, I am quite heavily invested and our cash is down to almost less than 15% at this point of time. We always get more exuberant than the market warrants. We always get more depressed than the market requires. It happens all the time. The only good part as we sit today in the market is that two-three things are very important and it is nothing to do with the market but the government policy.

It has been four days since the election results are out and oil prices have not gone up for the retail public. That is a seminal shift in the economic policy of a nation. From a complete pass through, we have not even had an increase post the election, notwithstanding the victory of the ruling party.

That tells us that there is a quantum shift in the policy. We need to support consumption compared to the earlier model of infrastructure driven policy. Whatever it is that happened to consumption, to me, the seminal shift is one of the best things that can happen to the market at this stage.

Number two is the triple digit number of sales. I have not seen it for a while. It is a great thing and finally the equity market is stabilising from the FII sale point.

Third, yesterday, the US listed China stocks were down to dust.

So if one is a global investor, one should look at India a little more kindly notwithstanding oil. Look at what has happened in China, look where we are in the global format. India with a seminal shift in economic policy towards more consumption is not a bad place to be and if selling comes down, then that itself is a big consolidation for the market and what a difference that can make!

If you feel that there is a seminal change in the government policy making and since the crude burden has not been passed on directly, is it time to revisit consumption stocks?
Till a couple of days back before the election, I was heavily negative because as we are expecting oil to take away a lot of the consumption basket. Today we would like to revisit on two counts. All the consumer majors have taken the price increase. That is one big thing and so they are going for margin protection at this point of time. There is no unnecessary competition in the market to grab market share by underpricing.

The responsible behaviour of the players tells me that they are now going after protecting the margins more than just the volumes which is a great positive in the longer run. That is how you protect your base in the company. The only reason I am not going to rush headlong into the major stocks of consumption is the PE multiples. Whichever stock you pick up – HUL or Nestle — except of course for ITC. The PE multiple still remains aggravated and we have seen what happens to elevated PE multiples. We saw what happened to diagnostic companies; we have seen what is happening to Jubilant Foodworks.

I am not saying it will happen to a Nestle or Hindustan Lever because they have a very strong base of investors but the fact remains that one has to be cognisant that even at the present levels, now that some of the dark clouds have gone, they have bitten the bullet on raw materials and passed on the cost increases. We are in a much better shape to reinvest but be cognisant that these are high PE multiple stocks therefore the returns possibly could lag the market at this point of time. But safety is there that they have bitten the bullet and government policies are now running in tandem with consumption. It takes a lot more confidence to buy consumption stories at this point of time.

Liquor stocks have always been your favourites. Have you added to Jubilant Foodworks. It declined yesterday or are you concerned about what happens after Pratik Pota?
No, I am not concerned. We started buying Jubilant yesterday and we are not concerned about changes. CEOs come and go at the end of the day, even the best of the CEOs. There are no transition issues unless there is something very drastically wrong in the company. The only concern is it is still elevated on multiples. It is still north of 40-45 multiples which is not in the comfort zone. So yes it is a good entry point and they have a very good story.

Their expansion plans are solid. Yes the CEO impact has come in and it has got discounted possibly in one day, which is very good for the market. I was a buyer yesterday to be precise. Coming to liquor companies, you know what has happened in Delhi Policy change. The same thing was copied by Madhya Pradesh. As more and more people realise that this is important and this can fund a lot of stocks which people want, this industry should be the best performing industry in the consumer sector, provided we have a hungry management.

The problem with MNC stocks is not necessarily liquor or even consumerism. In the last five years, the executives running these companies have not been hungry at all and that is why as a basket, MNCs stocks have not given any returns to shareholders.

The worst performing segment of the market has been MNC stocks; they have no Esops, they have no hunger, they get their bonuses and they are off for the next job after three to four years and that is an unfortunate story. I am a great bull on liquor shop products, liquor companies but I will keep my fingers crossed that their management team perform because in India if you cannot make supernormal profit with Black Label on your portfolio, then you are really doing something very wrong.

I wish I could buy liquor shop retailers in India, but there is no mechanism to buy it. I wish I could because it will be the greatest story for the next 10 years of retailing in this country.

You cannot buy liquor stocks, you cannot buy liquor shops. So how are you buying liquor stocks? There is USL, Radico and Globus.
There are only two of them. A disclosure, I have only two holdings in two stocks – USL and UBL at this point of time. The local ones will perform but again it is not the best place to be at this point of time because Indians prefer foreign models to be precise. In how many marriages do you see a Radico Khaitan whisky being served?

It is an aspirational product at this point of time and therefore will attract aspirational buying. I live in the north, where people love to show off. I think you would rather be on the MNC side than the domestic.

What is the view on the entire EV space? Given that a lot of these companies are now hitting the pedal when it comes to the EV space, does this interest you?
It interests me but I do not know how to participate in it because that is a big challenge for us. Which company do you go buy in the Indian market? You can certainly buy a Tesla and you are straight in the EV space. There were lots of companies in the US which one can buy. In India, you are not really able to buy an EV stock. If you buy Tata, then you buy a Jaguar Land Rover, the commercial truck business, the domestic car business or the old petrol engine, etc.

The challenge is yes there are lots of stories but how do you enter the capital markets in terms of finding the right company which is focussed on EVs because anything which is an amalgam of the two, is going to give you suboptimal return because these business are going to cannibalise each other. The Ford chairman said if I need to split the company, I have to do it. So I am not very gung-ho about how to enter the EV space also because everybody is trying to enter the space. The Indian economy is growing 5-7%.

The number of vehicles being bought are falling year by year. We are still five years away from the number we reached in two-wheelers. So the business is going to be cannibalised big time if the same company is selling EVs and normal motorcycles. Let us take Hero for example. It is EV positive, normal engine negative as a company; where do you see value? I am not very sure that in India, we are able to capture the EV value in the stock market. If you take an amalgamation company like Hero or TVS, then you are subject to risk of falling demand on an overall basis as has happened in the past five years. So keep away. There is no hurry. Let something come out which makes sense to us and then there will be enough time to buy.