Bullish on PC Jewellers and FMCG sector: Religare

In an interview to CNBC-TV18, Varun Lochab, director, Institutional Equities at Religare gives his predictions for the FMCG sector. "We are still fairly bullish on the growth prospects for these companies and we do not anticipate any major earning shocks out there," he says.

Among the newly opened IPOs in the gems and jewellery sector, Lochab opines PC Jewellers to be a good bet. "The company has been growing pretty well and the balance sheet looks relatively okay. The IPO is around 8 times current year on PE basis which looks quite attractive compared to most of the peers," he says.

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Below is the edited transcript of Lochab's interview to CNBC-TV18. Q: What is your word on PC Jewellers? Is it correctly priced compared to its rivals? How would you rate that stock?
A: Yes, from the company's fundamentals' point of view, it is a pretty well priced IPO. The company has been growing pretty well and the balance sheet looks relatively okay. The IPO is around 8 times current year on PE basis which looks quite attractive compared to most of the peers.
Also, the company is strong in diamond jewellery and given the fact that the company is based in North-India, it is beneficial for them as the consumer preferences there are fast shifting towards diamond. They are placed pretty well to tap on the opportunity. Q: We recently had another jewellery company, Tara Jewellers opening its IPO. Is this IPO better than that one? Should people who have already participated in Tara Jewellers look at this IPO? Was that better priced?
A: More than pricing, PC Jeweller has a bigger scale and in terms of the brand, it is a far more well-known brand. It is obviously a regional brand in North India, but it is a better brand and in terms of reach, it is better than Tara Jewellers. Q: A lot of the consumer stocks have been written off for the moment, but looks like today HUL is the flavour of the day. What would you recommend? Do you think it is still good to play with these outperformers HUL, ITC or would you advise investors to get into the mid-tiers?
A: Overall we have downgraded the FMCG sector from overweight, which we were running for almost two years, to neutral. We are still fairly bullish on the growth prospects for these companies and we do not anticipate any major earning shocks out there. Infact, the way some of the raw materials are cooling off, we will not be surprised if the Q3 and Q4 margin performance looks quite good for these companies.
On individual stocks, Unilever has been one of our top picks for a long time. However, we had recently downgraded to hold, as valuations look full around Rs 550-560 levels. So is the case with most of the other companies in the space. If I have to rate the company on the business, I think they continue to do very well. So we remain positive on the growth prospects in both the segments – soaps, detergents and personal products and similarly on the margin profile.
So compared to a lot of the other stocks, I think valuations are reasonable. So we continue to have a positive bias on Unilever and would advise adding to the stock on any declines.
_PAGEBREAK_ Q: What about the proper consumer companies in the broad consumption space? In this space which used to run up very significantly a year or 18 months back, are there any interesting candidates valuation-wise?
A: Valuation wise, most of the stocks have run up a lot. Even Titan, that we really like, has been our top pick in the discretionary space along with United Spirits and Bata for sometime. I won’t say that Titan valuations are very compelling or would give you a lot of comfort, but we remain positive on Titan given the way the jewellery demand is picking up now with the festive season and the wedding season around.
We remain positive on Titan for a two-three year view. Given the way some of the non-watches, non-jewellery business is scaling up in terms of eyewear and Fastrack and all, they are expanding their distribution footprint. 
We advise clients to keep it as one of the core holdings. One should keep holding to that name in the consumer discretionary space. Along with that Bata and United Spirits is something we continue to remain positive on. Q: Considering both valuation and technical factors, there could be some buying in ITC because there is a big ETF switch coming up. Considering all these views between ITC and HUL, which one would you prefer going by both fundamentals and these technical factors?
A: Between the two companies, our preference is for Unilever. We believe that the scope for margin surprise and earnings surprise is more in case of Hindustan Unilever compared to ITC.
ITC is a great business, but very well understood and very well discovered as well. Apart from the technical factors, we do not believe there are too many triggers in case of ITC on the business side that could surprise positively.
We believe there is a room for margins in case of Hindustan Unilever to keep surprising on the positive side. Similar to the way they have done in the last one and half to two years. So, our bias would be slightly tilted towards Hindustan Unilever at this point of time. Q: Among the FMCG stocks, what would be your preference? Is there any company that you feel has a very good growth profile and upside on margins?
A: Our top picks for sometime, in the midcap space have been GSK Consumer, Dabur and Emami. GSK Consumer and Emami have run up a lot and therefore the near-term upside in these two look limited, but we still remain positive on both of them given the growth profile and the scope for margin surprise in case of Emami and Dabur in particular.
I would pick these three as the top midcap picks. Dabur and Emami in particular look fairly well-valued compared to rest of the other midcaps.
A lot of the other midcaps like Marico, GCPL are trading at 27-28 times FY14 compared to Dabur and Emami that are trading at 23-24 times. So, that gives us slightly more comfort on the valuation side. Q: TTK Prestige seemed to have given up a lot of its excellent verve after the results came in, but then once again it is showing a lot of enthusiasm. Is that a stock that you cover? Also in Tribhovandas Bhimji Zaveri (TBZ), a vertical rally started off about six months back. Do you think PC Jewellers will show something like that?
A: It is difficult to call on how exactly the stock will move in the short run. In case of TBZ and a lot of other jewellery stocks, they have moved very sharply in the last three months. This is because after a lull in terms of jewellery demand for almost four quarters till Q2 of this year, from Q3 we are starting to see positive commentary on jewellery demand picking up.
Therefore all jewellery stocks have been in favour and so has been TBZ. Obviously the extent of hike has been higher in case of TBZ. However, if you look at TBZ again, a lot of growth expectations are there in terms of their new store openings which are yet to deliver on.
Compared to that, PC Jewellers already has 30 stores and they are looking to add only 20 in next two years. So even from an execution point of view, the risks are slightly lower in case of PC Jewellers.
We do not cover TTK, but we have been tracking the stock on a soft coverage basis. Q2 was a bad quarter and the stock really came off post those results. However, a lot of those issues were on and off; like the induction cooktop issue, especially the problems they faced in Tamil Nadu.
So I think those should even out in a quarter or two. We do not expect that the growth will go back to the 30-40 percent levels where they were, around 12 months back, but things should improve compared to Q2 levels. Therefore the stock is starting to price in improvement compared to the last couple of quarters.