ITC has been in the limelight for the past three days but the stock is still an underperformer year-to-date. Is there more steam left in the FMCG space? According to Varun Lohchab, Regional Head of Consumer, CIMB Equities, ITC remains attractive and he will hold on to the stock. He believes that most of short-term gains on ITC are over.
Discussing other stocks from the space, Lohchab said he retains hold on to Marico, Jubilant Food and Britannia and even on Colgate on steep valuations.
Below is the transcript of Varun Lohchab's interview with Ekta Batra & Anuj Singhal on CNBC-TV18.Anuj: Let start with ITC because that has been the stock of the last three or four days but still a ranked underperformer year-to-date. What is your call on that stock now and how would you read the news that the sale of lose cigarette ban that was being proposed is not going to take effect? A: ITC remains a buy for us it is one of the few stocks in consumer sector where we have a buy rating. Valuations were clearly positive and looking reasonable relative to the sector. The first positive news that we got from the regulator front after several months of negative news the stock has given a good sort of an upside. Still on a relative basis we feel ITC is attractive, earning growth trajectory will still be in mid-teens and therefore one can continue to hold on to the stock. From hereon the stock might just consolidate and look for cues in the Budget which is just round the corner. So, depending on the excise hikes around the budget one can have a fresh look at the stock.
Ekta: What would your target price on ITC be at this point in time because your previous target price that I have is Rs 385 so it surpasses that already? A: All the consumer stocks off late given the rally have surpassed are target prices. However as we go into the next year we would be rolling forward our target prices so there could be upside. So, as I said on a relative basis ITC still looks attractive to us. The four buys in the staple space which we are ITC, Marico, Britannia and on the discretionary side we have the Jubilant FoodWorks as a buy. Stock prices for some of them in the near term might be around the target prices.Anuj: Do you have a rating on Colgate that is one stock that would be considering interim dividend today and what is you call on that stock?A: Colgate we have a hold rating. Valuations seem quite full to us though on the business we continue to be positive. We believe the margin expansion would continue which we have seen compared to the lows in terms of margins at 15 percent odd level which we saw 12 months back. So, on the business we are positive on both topline and margins but valuation looks completely full to us from the next 12 months perspective so it is a hold for us at this moment.
Ekta: The last rating you had on Asian Paints was a whole. Do you think that the current outperformance that the Asian Paints has shown is making you change your mind at all on the stock?A: In terms of Asian Paints again the crude fall will definitely impact earnings positively. We are yet to revise our earnings upward. Though the extent of benefit may not be kept completely with the company they would be looking to pass on some benefit back to the consumers through price cuts if the current crude price sustains. However we believe there could at least be 8-10 percent of earnings per share (EPS) upgrade even after passing on the benefit. So, in that back drop the recent upmove of around 20 percent which we saw in the last one to two months is more or less justified. But again like rest of the sector valuations at this point of time again don’t provide material upside over 12 months. We have a whole rating on Asian Paints as well. In terms of absolute upside looks limited after the recent upmove but on decline that is a stock which one can look to buy.Anuj: One stock which had a good period about two or three months back but has been consolidating since is Bata. I believe you have a call on that stock as well?A: We have continued to like the company fundamentally for the last three to four years we have had it in on our buy for a long period of time. Just at the beginning of the year we are down getting it to hold given the fact that the valuations were looking full. We expected it to kind of bear the brunt of urban slowdown. We have seen in last three quarters that numbers have been fairly flattish at earnings before interest, taxes, depreciation, and amortization (EBITDA) and profit after tax (PAT) level. So, in terms of valuations they seem to be getting bit more normalised now with the stock being fairly range bound over last three to six months. So, I think on any sort of declines we would look to buy into Bata. Fundamentally we remain positive on the company.
Ekta: How about Hindustan Unilever (HUL)?A: HUL they have been executing quite well. Valuations again limit us from putting a buy on the stock. We have added it on a hold for sometime now. We believe volume growth will at least, you have seen the worst it will not go below that 4-5 percent levels. They are also a beneficiary of that crude fall and Palm oil which has fallen in the last two-three months. So, earnings there could be some upside compared to our end consensus estimates. That is one of the stocks where we are above consensus on estimates even before the crude price fall. So, earnings will remain well supported but the recent upmove from Rs 700 to Rs 820 odd levels clearly, again makes the valuations full from next 6 to12 months. On the consumer sector you need to see some sort of a consolidation in stock prices specially post the 20 percent sort of a run up in the sector which we have seen in the last three months. Valuations at almost 35 times one year forward if I exclude ITC clearly look full. Even for the EPS upgrades that we might get because of the commodity prices sentiments.Disclosure: We have these ratings and we make advice to the clients based on these recommendations.
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