Daily Voice: MOFSL's Gautam Duggad prefers consumer discretionary stocks over traditional FMCG names, cautious on defence space

We expect consumer companies under MOFSL universe to post moderate earnings growth of 4 percent YoY in Q2FY25. After three years of slowdown, there are some early signs of recovery in rural consumption. The CY24 monsoon season has concluded with rainfall 8 percent above the long period average (LPA). Corporate commentary from various sectors indicates that rural demand may be bottoming out. This, coupled with the potential rate cuts by the RBI could lift the sentiments in 2HFY25. While we expect breadth of earnings remain a mixed bag, staple companies would post modest performance YoY and sequentially.

Will Q2 FY25 be a strong quarter for the industrials segment?

The Capital Goods and Industrial companies under MOFSL Universe is projected to report earnings growth of 13 percent YoY for the quarter (however, the lowest in ten quarters), dragged down by L&T. Ex-L&T, the MOFSL Capital Goods Universe is likely to post 29 percent YoY growth. After better-than-expected ordering in Q1FY25, we expect Q2FY25 ordering to improve for selective segments. Delayed decision-making in government projects and delays in the finalization of the private sector inquiry pipeline can impact companies focused on EPC and private capex.

However, other fast-growing segments, such as data centres, transmission, electronics, and renewables, continue to boost inflows for companies. We expect 12 percent YoY growth in execution in Q2FY25. Margins should be in a stable range given benign commodity prices, cost-saving measures, and an improved product mix. As a result, we expect a ~50bp YoY expansion in EBITDA margin for our coverage universe.

Do you expect some cuts in full-year earnings growth following the Q2 numbers?

We estimate the MOFSL Universe earnings to remain flat (lowest in eight quarters) and Nifty earnings to grow marginally by 2 percent YoY in Q2FY25 (lowest in 17 quarters). Margin tailwinds are likely to ebb due to a high base. The EBITDA margin (ex-Financials) is likely to contract 150bp YoY for the MOFSL Universe, reaching 16.4 percent, mainly dragged down by oil marketing companies. Hence, due to major earnings cut for commodities, we have reduced our FY25 and FY26 Nifty EPS estimates by 4 percent/3.6 percent to Rs 1,072 and Rs 1,269, respectively. Metals and Oil&Gas have driven 80 percent of the 4 percent cut in FY25E Nifty earnings. We estimate the Nifty EPS to grow 7 percent/18 percent in FY25/FY26.

Is the Hyundai IPO overvalued? Is it better to prefer Maruti over Hyundai?

In four-wheeler, our preference is with M&M which is our preferred idea and is also part of our model portfolio

Should one hold and accumulate stocks from the capital markets sector?

Capital markets sector have seen a strong tailwinds led by buoyant retail participation since CY20. The momentum has got stronger in the past couple of quarters. Resultantly, capital market players under MOFSL Universe are projected to clock strong earnings growth of 85 percent/52 percent YoY in Q2FY25/FY25. The demographic dividend, digitization, account aggregation and customer centric regulations will continue to drive a sustainable strong growth in revenues and profitability over near future. Furthermore, these companies have asset light model, high RoEs, superior cash generation and healthy dividend payouts enabling premium valuations. Hence, we expect the sector would continue to outperform in coming years as well. We like the Capital Markets theme as it is a part of the broader Financialisation of Savings mega-trend.

Have some defence stocks reached interesting levels now?

While the defence stocks have corrected from their highs, we still believe that the sector continue to trade at a premium valuations. As the companies in the sector is mainly dependent on Government order inflows, we do not expect any major demand triggers before the next budget session. We would remain cautious on the sector and would wait for further confirmation on order books build-up post the Budget announcements in 2025 and the management guidance on the past order book executions.

Are FMCG stocks still overvalued despite the recent correction?

While the FMCG stocks have witnessed a strong rally since the start of FY25YTD, their earnings performance have remained muted as of Q1FY25. We expect marginal improvement in demand in Q2FY25; however, heavy rain and floods in certain regions had also affected demand of some of the categories. An above-normal monsoon, rural pickup, distribution expansion, seasonal benefits, steady raw material prices and government spending provides better visibility on the earnings growth in 2HFY25 vis-à-vis the delivered performance of FY23/24/1HFY25. We prefer consumer discretionary names over traditional FMCG stocks. We are overweight on consumer discretionary in our Model Portfolio and hold Titan, Indian Hotels, Zomato, Cello, Metro. We also like Trent.

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