Positive on Dabur, Marico, Bata and Emami: CIMB

After the tremedous rally in FMCG stocks, many believe the valuations in the sector are stretched. Varun Lohchab, Director, CIMB, however, is positive on quite a few of the midcap companies in the space. He says Dabur reported good September quarter numbers, both in terms of sales as well as profit growth. He is also positive on Marico, and added it is the only stock that it has upgraded in the last 12 months. He is also bullish on Emami and Bata.

Lohchab also shared his views on individual stocks such as ITC, United Spirits and Jubilant Foodworks. Below is the verbatim transcript of Varun Lohchab's interview on CNBC-TV18 Q: What would you do with Jubilant Foodworks?
A: We maintain our underweight stance on Jubilant Foodworks. You see the valuations. They continue to be very lofty which implicitly means investors are building in some sort of a recovery in same-store sales growth and margins gong ahead whereas we do not foresee that happening in the next few quarters. So we believe there will be disappointments on the way and sometimes news related to new tie-ups and all have kept the stock price at these valuations, but risk reward is clearly not favourable. We are not seeing any signs of urban consumption picking up for that matter. Across the quick service restaurant (QSR) space if you see the same-store sales growth has been quite weak and we do not expect that trend to change. Q: You are positive on United Spirits. What kind of a target price do you have there and what would the triggers be?
A: We have just recently downgraded United Spirits from buy to neutral. We were quite positive for the last couple of years and it was our top pick. Our target price is Rs 2,500, so from current levels we believe upside is capped. One of the reasons for our downgrade was precisely the earnings cut which we have done. When we look at next year our revised Earnings Per Share (EPS) is around Rs 41 whereas consensus is still around Rs 60, so there is a wide gap and we believe possibly there will be more downgrades in the offing in the next 6-12 months which will keep share price upside quite limited from these levels. I think it is a case of the whole community getting too bullish on the margin recovery which we believe will happen over a period of time, but it will be more back-ended and probably till FY15 we do not see a big recovery in EBITDA margins from the current levels. Q: What is your take on ITC?
A: We have been in the bearish camp, so we have a hold on the stock. If you see most of the analysts have a buy rating on the stock. It is a consensus buy stock. Our thesis has been that valuations were quite rich, especially around Rs 350-360 levels we believe the stock looks almost fully valued, because the cigarette business at the end of the day is exposed to regulatory risk and therefore you cannot pay a very high multiple despite the earnings resilience which it has typically shown. In this year even in terms of cigarette volume resilience has not been that strong because we have seen very successive sharp price hikes in the cigarettes business.
So I think ITC still remain a more steady defensive stock out of the entire lot in terms of the consumption downtrend, but we would be buying it only at the right valuation which according to us is closer to Rs 300 or below levels. So we have a neutral on that stock. Q: Is there any positive that you see in the midcap FMCG space? Did any of them impress you with their numbers?
A: In terms of numbers some of the companies reported pretty good numbers. If you look at Dabur they did pretty well on both top-line and bottom-line. Dabur is one stock where we are constructive now, especially given the correction which we have seen post-results. So I think from these levels Dabur looks good. Marico is one stock which we have recently upgraded. It is the only stock which we would have upgraded in last 12 months. So I think in case of Marico though the numbers were not great on top-line this quarter, but we believe there will be a recovery going ahead. Valuations again are reasonable out there, so Marico is one stock which we like.
In terms of the broader consumer space Bata is one name which we continue to like and have a buy on. Their numbers were also quite good. Given the environment they did good top-line growth and margins surprised positively. I think some of these midcap companies still have room to grow given the distribution growth that they could see in rural India. So Marico, Dabur, Emami and Bata would be some of the midcaps where we are more positively inclined.