FMCG a mixed bag; overweight on auto: Prabhudas Lilladher

While the FMCG sector has had a mixed bag in terms of earnings in the second quarter ended September 30, 2016, an analyst says the second half of FY17 is likely to be a good one for players in the sector. There is tremendous pressure in staples and volume growth for Dabur and Hindustan Unilever (HUL), said Ajay Bodke of Prabhudas Lilladher. He added that though FMCG companies are witnessing a slowdown in rural consumer demand, a good monsoon, implementation of Seventh Pay Commission, and crop output will see consumer demand pick up in December 2016 and March 2017 quarters.Bodke said Britannia is a top pick in the FMCG space while investors could buy into any dips in ITC and HUL.Moving on to auto sector, Bodke said he expects auto companies to post a strong show in H2FY17. Prabhudas Lilladher is overweight on auto sector and prefers Maruti Suzuki and Tata Motors.Besides, midcap pharma space and retail-focused banks can also be investors' choice, Bodke said.Below is the transcript of Ajay Bodke’s interview to Sonia Shenoy and Anuj Singhal on CNBC-TV18.Sonia: I first want to ask you about the fast moving consumer goods (FMCG) space because over there, there was a mixed bag. Some of the companies like Colgate Palmolive did really well this quarter or at least better than their peers while others like Marico, there was a lot more left to desire in those numbers. What has your pick of the pack been in this quarter for the FMCG sector?A: As you rightly said, it has been a mixed bag. If you look at the numbers that even Dabur and Hindustan Unilever (HUL) has posted, what clearly is coming out is that there is tremendous pressure so far as volume growth for staples are concerned whereas some of the discretionary items in the basket, one is clearly seeing more traction out there and the companies are essentially attributing it to a tremendous slowdown in demand from the rural side. And although they are expecting a boost to the rural demand because of the Seventh Pay Commission as well as a good harvest expected in Kharif, followed also by Rabi, the sustenance of the rural demand companies feel is only when the general levels of salaries go up in the economy and the economy picks up traction. So, the general outlook is that both in December quarter and the March quarter, one will see the volumes strengthen from here on, on the rural sector and the good show that companies have put up in the urban sector should continue. However, long-term sustenance, one will still have to wait and see how the economy growth finally pans out in the rural sector after the harvest. So, in the FMCG space, our analyst prefers Britannia as the top-pick out there although he does feel that on dips, one can continues to look at HUL and also ITC.Anuj: What about auto stocks? Today, of course, we will have the sales numbers as well. This is one sector which has done well and it has been a secular run for most of these stocks. Do you expect that to continue and what is your top-pick?A: We have been positive on auto sector and the volume numbers continue to surprise the markets in most of the categories in auto sector be that both in the second half of the year. We continue to remain very strong for the auto companies and one should continue to allocate large allocations towards auto sector and be overweight in autos. Maruti Suzuki India and Tata Motors continue to remain our top-picks. We expect in the medium-term a Rs 6,500 price in case of Maruti and around Rs 650 price in case of Tata Motors.We feel that autos will get a boost if and when RBI decides to go in for one more rate cut which in our view is in the offing because RBI has been pretty clear that they are looking at a real rate of interest of 1.25 percent and the last consumer price index (CPI) reading at around 4.31 percent, there is still, in theory, a 75 basis point gap between the repo rate and the current CPI inflation. So, a 25 basis point rate cut, I would not be too surprised if we get from the RBI in the coming meeting which will act as a booster to all the interest rate sensitive stocks and autos will be leading that.For full interview, watch accompanying videos...