Bet on FMCG stocks in run-up to polls, ITC best: ICICI Sec

Anup Bagchi, MD & CEO, ICICI Securities believes that in a run-up to elections, fast moving consumer goods stock will be the best bet, as the government spending before elections is likely to increase discretionary spend in the economy.

"There is a hypothesis that as the election year comes, the spending will increase and if spending increases then liquidity will come back and if liquidity comes back then the whole cycle will start," Bagchi said. Although FMCG stocks are at historically high multiples, they will hold up, he added. Also read: Hindustan Unilever hits record high on MSCI rebalancing
Among FMCG stocks, ITC, which has been hitting a new high since past few weeks, is still a best bet. "Other businesses of ITC are also doing well. Cigarette is a cash cow. So I think it is not a unwise thing to still be after ITC," Bagchi explained.
He advised investors to keep away from balance sheets which have high dollar debt and liquidity issues. Below is the verbatim transcript of the interview Q: What have you made of the series of onslaughts that have hit corporates, we had the rupee depreciation and now we have a fairly serious tightening of interest rates, are you looking at a fairly serious downgrade of earnings, what is your earning expectation standing before all this and what could you have downgraded it to?
A: In the last one to one and a half years, we have seen a lot of dollarization of balance sheets in the sense that a lot of rupee loans got converted to dollar loans. A lot of them have foreign exchange exposures. To that extent of course the currency was certainly hurting. Now with tightening of rates, the people who have got loans will also get hurt. There are three levels of pain, one is a currency pain, second one is the loan pain and third one is a receivable situation. So a lot of people are sitting with long receivables and the cash flow is not moving in the economy and in the corporates. So the working capital pain is also going to come.
On the banking, financial services and insurance (BFSI) side, all the banks which don't have very strong liability, current account saving account (CASA) franchise, which are depended on wholesale funds, they will start to get hurt. But the street has always been cautious on heavy balance sheets, a lot of dollarized balance sheets and everybody is underweight on those balance sheets in any case. Q: You have a number in mind, how much might earnings be downgraded?
A: No, I do not have a specific number in mind. Q: There is one theory doing the rounds in the market that the numbers in the earnings will improve in the second half of the year because of pre-election spends and higher corporate earnings and this is the best time to be getting back into the game and to be buying individual stocks, is that your view as well and if yes, where would you recommend accumulation now?
A: There is certainly hypothesis that as the election year comes, the spending will increase and if spending increases then liquidity will come back and if liquidity comes back then the whole cycle will start.
If you look at past data, on all election years this has been borne out. So all election years the return has been more than positive, historically. So yes, the hypothesis looks okay from a previous evidence perspective. Still there is a pain on the balance sheet side. I would say that a shift out company which have pain on the balance sheet side, which is by way of dollarization or very large projects which are stuck; versus companies, which have liquidity/receivables issues; which if government spending starts, will trunaround. So certainly consumer stocks will hold up although they are at historically high multiples.
I will still not say that people should jump in asset heavy stocks, but certainly receivable oriented services sector, there will be respite. Q: Give us a word on the levels in the Nifty or the Sensex whichever you track, you think the market has put a bottom at around that 5,600 mark despite severe reverses we have not breached it, would that be a confidence factor or do you think that we could yet see a big outflow of equity funds which could put this level in danger?
A: Averages don't tell the full story. If you look at the multiple, the market is very clearly bipolar in the sense that there is a set of stocks, which is trading at very high multiples and there is another set of stocks which are trading at very low multiple and thus the averages are what they are.
People are still underweight on low multiple because they still think that the pain is going to persist. It has rewarded them. So every time a person has tried to do bottom-fishing, they have got hurt even more and it has gone down. Multiples on the higher side which is light balance sheet, free cash flow companies, they are trading at all time high. So averages don't mean much on the index because of the bipolar nature.
Certainly the money that is coming in from FIIs through exchange traded funds (ETFs) etc clearly starts to go towards these companies because as the prices come down, the weightage has come down and so it starts to move towards that and that is what is holding the price up. There are various kind of investors, this is for the FII.
For DII, they are running with the liquidity issue in the sense that inflows are not coming into equity fund. Q: ITC has been hitting new highs everyday and seems like the safest option in this environment, how would you approach it?
A: It certainly is. People have been also underweight on ITC for a very long time and the performance has got hurt because of underweight in ITC. So people are catching up. People still think that there is differential valuation between HUL and ITC and it will catch up. Other businesses of ITC are also doing well. Cigarette is a cash cow. So I think it is not a unwise thing to still be after ITC. Q: Would you be after Infosys as well?
A: We will be equal weight on Infosys and one will have to see the turnaround coming but certainly it has given hopes back. so people have again entered because it was underweight.
For retail customers, it is a different thing. They are not a benchmark so they don't feel happy if the market is down 25 and a fund manager is down 15. They don’t feel happy. So once that is there, they get into fixed income. So that is why the money is not flowing into equities because they run absolute return but they have to get positive return which is why money is getting into debt that is on the retail perspective. For benchmark index, this is how people are thinking at this point in time.