Weak monsoon to impact consumption, FMCG names: Nine Rivers

Apart from the weak data emerging from the eurozone, Indian equities have domestic headwinds to contend with as well. Lack of government action, sluggish growth and high inflation has plagued the market for the past many months, but now a more serious issue has cropped up.

Weak monsoon this year has hit sentiment in the country, increasing worries about the country’s economic development. The Indian Meteorological Department has said that rain deficit average is 22%, but some parts of the country are approaching drought like conditions. This situation will pose as a hurdle for the market going forward, says Sangeeta Purushottam, managing director of Nine Rivers Capital. In an interview to CNBC-TV18, she says that the street cannot shrug this off because of the impact that it has on the economy. “I think at the economic level, a poor monsoon will impact consumption and the FMCG pack could see down trading happening,” she said, adding that “whatever is linked to monsoon, be it tractors or be it fertilizers etc, will be pockets which will get affected.” However, from the FMCG space, Purushottam is positive on HUL for the near-term. Valuations are stretched, but she believes this will sustain because of the company’s earnings growth. “Where it gets a little dangerous is if you are buying it with a long-term perspective, because then you have very little room for error here,” she said. She is also positive on HCL Tech, but has a bearish outlook for Maruti. Below is an edited transcript of her interview with Udayan Mukherjee and Sonia Shenoy. Q: Hindustan Unilever (HUL) saw a 7% up move yesterday in response to the numbers. How much more upside do you see given valuations here? A: I think the valuations are clearly stretched, it’s way beyond the higher end of its PE band. But given the kind of market we are in, where there are select pockets which are actually giving earnings growth, it is possible that these kinds of valuations will sustain for a while. What I expect to happen after yesterday’s numbers is that there will be some earnings upgrades as well, so there will be some adjustment for that. But even though the valuations are stretched on the near time, they could well sustain. Where it gets a little dangerous is if you are buying it with a long-term perspective, because then you have very little room for error here. Q: What is your reaction to the initial numbers that we have gotten from HCL Tech and how would you approach the stock now? A: HCL Tech has been outperforming in terms of both the stock performance as well as the earnings trajectory in the sector, and therefore it remains one of the small pockets of hope amongst the larger companies. So as long as that performance continues, the stock will continue to do well. As far as the whole IT pack is concerned, it has become a very stock specific thing. There is a little room for error because if somebody doesn’t deliver you could see a sharp de-rating. It is not a sector wide story, it is very company specific, which tells you that there are stresses in the environment. Then it really becomes a question of how good you are at predicting what happens with a particular company. Q: Do you shrug off the monsoon worries as something which is noise and does not have material impact on the market, or do you think it could cause some derating or compression in prices? A: I would worry about the monsoons. Even at a macro level if we say that we have enough buffer food stock and it is not really going to lead to huge amount of stress, I think at the economic level a poor monsoon will impact consumption and the FMCG pack could see down trading happening. So whatever is linked to monsoon, be it tractors or be it fertilizers etc, there will be pockets which will get affected. There will be some level of stress so I don’t think you can shrug it off. Q: Just a word on two of these stocks that have seen disparate performances - Polaris and Geometric that had a good performance. A: I do not follow some of these stocks very closely. Q: What do you do with Maruti given all the news flow of the last few days? A: To my mind, Maruti really has more longer term issues. Over a period of time you are going to see competition increase, we are seeing that already, and that has always capped Maruti valuations beyond a point. So I see this as a stock which has shorter cycles of performance rather than something I would put long term money into because it will slowly lose market share. In the short term there will be some stress, but there could be a bounce back because the stock has fallen so sharply. However, it is not something I am comfortable investing for the longer term.