Kotak Institutional maintains cautious view on FMCG Sector

Manoj Menon of Kotak Institutional Equities, has a cautious view on the FMCG sector. Menon is bullish on HUL and ITC. In an interview to CNBC-TV18, he said, "Both the stocks have not really gone into the zone where I would call it exorbitant valuations."

In an interview to CNBC-TV18, he said, "Apart from Hindustan Lever and ITC we would relatively prefer Godrej Consumer, Glaxo and Marico." Also Read: IT stocks could slide 5-10% from current level says JP Morgan Below is the edited transcript of the interview with Latha Venkatesh and Reema Tendulkar. Also watch the accompanying video. Q: Do you expect relative outperformance in this sector or do you think that along with the rest of the market, we are going to see some kind of necks? A: We do not really see too much of earnings risk for the sector as a whole for the next one year. There are two basic assumptions which we have made. One is that the commodities would behave not been too inflationary from hereon because incrementally it looks to be very difficult for most companies to take further price increases because the demand scenario particularly on the discretionary side is definitely not improving. Secondly, if you go by small trends which came out from the first quarter performance, some of the volume growth seems to have been lesser there than what the companies have delivered in FY11. So if you look at the overall earnings growth, risk looks limited assuming that commodities do not get further inflationary from here. However, since the sector has been perceived as a safe haven, what we are finding is that the valuations have gone up indiscriminately across the sector even for companies which have not really done well in earnings. There is risk for those companies going through a correction but I wouldn