Motilal Oswal Fin Services bullish on FMCG, consumption sector

Ahead of the Motilal Oswal 12th Annual Conference that begins on Monday, Gautam Duggad, Head of Research - Institutional Equities - Motilal Oswal Financial Services, told CNBC-TV18 that FMCG space is a theme that the broking firm is bullish on.

Duggad said the firm expects a consumption boom in the second half of FY17 as the government has raised the Budget spend for rural sector. The last six months have seen a pick-up in demand in rural sector. One can hope for rural consumption recovery on the back of a normal monsoon, he said.

He said Asian Paints, Britannia, Pidilite and Titan are some stocks the brokerage is positive about, he said.Below is the verbatim transcript of Gautam Duggad’s interview to Sonia Shenoy on CNBC-TV18.Q: How do you see consumption trends?A: Last two years we have seen a significant moderation in specifically the rural consumption side and a couple of factors were responsible for that. Not the least being two consecutive droughts that we have seen and secondly of course we have seen severe deceleration in the rural wage growth. Last 5-6 years every single year we have seen a deceleration in the rural wage growth. So, it has been flattish for last three years and of course coupled that with the fact that minimum support price (MSP) price hikes have been low and government's focus on managing the inflation in the overall macro economy. That has resulted in slight bid of let off in the consumption spending on the rural side.On the contrary urban has been pretty decent in that sense. We have seen 7-8 percent kind of growth in the urban side. But last six months we have seen depending on which company you speak to there has been some sort of deceleration and pick up also. So, discretionary side things are pretty good. Staple side it is very mix and now that monsoon has started pretty well we are seeing normal monsoon after two years hopefully in the second half one can hope for a consumption recovery specially on the rural side.Q: You track a lot of stocks in this sector. Some of your favourites have been names like Britannia, Pidilite, Emami, now these stocks have been big wealth creators for Motilal Oswal. But the question now is how much of an incremental upside is there to names like because these stocks have become very expensive?A: Yes, no second thoughts on that because consumption space has been very expensive and all the stocks have got rerated significantly in the last 10 years for variety of factors because the sector growth has been pretty solid in the context of a market where Sensex earnings per share (EPS) growth has been flattish for the last eight years whereas consumers sector as a whole you would have seen 14-15 percent compounding earnings growth and second, lack of choices for investors to invest in beta sectors given that banks have been going through some bit of problem. You have not seen any recovery in industrial sectors. So, clearly money has migrated towards defensives.Q: So, there is no alternatives basically?A: Yes, so that has helped and there is a lot of discussion which happens on valuation but a lot of it is focussed on one year forward or two year forward earnings, if you go back 10-20 years and if you see the kind of wealth consumer sector has created I was just looking at some data points, companies like Britannia, Pidilite, Emami, Marico all of them have given 25 percent plus compound annual growth rate (CAGR) returns across any time period in the last 20 years.Q: But is that something that can be replicated over the next 3-4 years for Britannia for example?A: Predicting forward it is little bit tough but given where India is in terms of the penetration levels, in terms of the per capital consumption levels since you mentioned Britannia last three years they were growing volumes at 9-10 percent whereas the biscuits industry has been growing at 2.5-3 percent. So, they have been growing volumes at 3.5x. last four years their earnings CAGR is 44 percent and that is reflected in stock returns. Last five years the CAGR is 69 percent. So, I am quite bullish on some of the discretionary names.Q: There are lot of things working in the favour of the consumption sector whether it is the Budget spending in the rural economy that has gone up from the government's end, seventh pay commission etc, if you had to drill it down to stocks what are the stocks where you see maximum value now?A: Between the two spaces, staples and discretionary the choice is more toward discretionary and within that space you have lot of areas to play, paints for example, adhesives for example, you have home materials, you have jewellery stocks.