Historically, the Indian market has observed a high degree of volatility in the month immediately preceding general elections.
What is different this time is the current global macro headwinds like trade war, slowing global growth, concerns around US recession and the central bank’s autonomy that has been creating heightened tension among the market participants.
Data suggest that both central and state governments boost spending in the run-up to general elections. So as expected a similar thing was witnessed in the budget.
What is happening in the budget?
The central government remained populist and the Prime Minister ensured his team announces some sops for everyone who constitutes the vote bank in the economy. It is evident that the ruling BJP led NDA would try to turn the tide in their favor after having lost the Hindi heartland late last year.
Sectors to bet upon
I believe the government could spend aggressively and pump in funds in the rural economy and will also look to stimulate the SME sector. Thus, thematically I think the consumption space will outperform others.
Therefore, sectors such as Fast Moving Consumer Goods (FMCG), Consumer Durables (CD), Electrical & Electronics, Agrochemicals, and Financials sector are likely to benefit from the government schemes.
What’s my pick during the election season?
In continuation to the above, my portfolio is biased towards large-cap names with strong earnings visibility. These names are considered to be resilient to macro risk and come with a reasonable valuation.
Following are some of the names which I believe is likely to provide healthy returns this election season –
Mahindra and Mahindra Ltd.
Tractor and Farm Equipment
The company may witness strong growth in tractor volumes with the normal monsoon, higher MSPs, and resumption of infrastructure investments (10-20% of tractor demand). Tractor volume could grow at around 8-10% per year. Also, with increasing non-tractor mechanization (implements, harvesters, etc.), the company could see strong revenue growth.
On the utility vehicles side, I believe the passenger UVs is likely to benefit from rural recovery and new launches. Further, its upcoming launches are expected to drive volumes higher. The company is also responding to the changing dynamics of the industry. The company is expected to challenge market leaders like Maruti and Hyundai in the compact SUV segment where it has a weak presence.
There could be some weakness in pricing owing to aggressive marketing, but eventually, at the consolidated company level, the company may perform well.
For the Cigarette business, the Earning Before Interest and Tax (EBIT) has increased owing to stable taxation. However, due to rising leaf cost, tobacco cost and capsule filter there could be margin pressure. However, ITC has taken double-digit price hikes in its crucial portfolio that accounts for majority volume. Thus, the margins are likely to stabilize going forward.
In the FMCG segment, the EBIT margins have improved with strong growth in atta (flour), biscuits (Dark Fantasy has been growing double digit), Snacks and noodles.
New segments and plan
The company is foraying into newer segments such as packaged non-basmati rice market.
The company has also been adding products in its different verticals. For example, the company added four variants of RTD milk beverages under Sunfeast Wonderz brand in Karnataka and Tamil Nadu. It launched pouch milk under Aashirvaad Swasti and curd under Aashirvaad Swasti Dahi.
ITC also launched four new variants of Sunfeast Yippee noodles. In the snacks segment, the company launched traditional flavors snack Tedhe Medhe Wakhra Style under Bingo brand. The company is looking to expand its dairy segment by launching paneer in Kolkata and milk beverages on a pan India level in the near term.
Thus, I feel the company’s strategy to reach profitable growth within each of the segments after achieving meaningful scale shall be crucial support to the stock price.
Colgate Palmolive (India) Ltd
The company posted healthy volume growth which has been benefiting the top line. Also, the company is focused on lower its operating cost. The staff cost has reduced, and the company has been successful in lowering the other expenses while improving its capacity utilization levels. The strategy is likely to be continued, and thus the margins at the operating level are expected to expand further.
I believe the company’s market share in the toothpaste and toothbrush category should expand with the uptrend in the volume growth.
Also, with increase traction in the herbal segment, newly launched, and rising ad spend is likely to support future growth.
Lastly, the company enjoys a market share of 60% in rural India with rural contributing to over 40% of its sales. This makes it a promising play for the company on the back of rural recovery that is underway. Thus, I continue with my conviction in the scrip.
Hindustan Unilever Ltd.
The company has been witnessing health volume-led growth. Also, with improving utilization levels, the operating profit has been growing for India’s largest FMCG player.
The company is committed to innovation, market development, and improved supply chain. Thus, the growth has been reasonably balanced across segments especially the homecare segment which managed to deliver double-digit growth despite a high base.
I believe the continued focus on the volume led growth and its committed focus on market development activities, customer-focused innovation shall help the company grow over time.
Lastly, the company has been doing a lot of activities catering to the upper middle class and high-class society. Thus with rising premiumization, the company could see support in its profitability level. Because the company maintains a strong position to deliver above market expectation in a somewhat competitive industry, I continue to maintain my conviction in the scrip.
Also, the stock could see support from the synergies the company would derive from the merger of the GSK franchise.
Crompton Greaves Consumer Electricals Ltd.
ECD and Pumps
The company is likely to see healthy growth and margin in the Electric consumer durable (ECD) segment which will be driven by premiumization of fans, volume growth in pumps and the revamped portfolio of geysers. Also, the company has embarked upon a cost reduction programme which is likely to help the company attain a double-digit margin.
In addition to the planned product launches in the pump segment, the company has developed innovative anti-bacterial LED lighting. This light can kill up to 80% of bacteria in homes and has received certification from the Indian Medical Association. With a premium 15% premium over the prevailing LED prices, the company is likely to get success in the product as it readies itself to launch the product at a pan-India level.
Thus, I believe with healthy fixed-asset turnover, steady cash flow, and healthy working capital cycle; the company continues to be a buy for the season.
TTK Prestige Ltd.
TTK Prestige operates in three major segments – Pressure Cooker & Pans, Non-stick Cookware and Kitchen Electric Appliances. The company enjoys high brand recall that enables it to maintain a dominating position in the segments in which they operate (60% in the outer-lid pressure cooker, ~15% in inner-lid pressure cooker within the organized market and 25% in the induction cook-top space).
Revenue from the domestic business and exports business grew at a double-digit pace. I believe the company could also benefit from the softening of commodity prices. This shall augur well for gross margin expansion and subsequently the operating margins.
The company is also focusing on cost optimization techniques including reduction of another cost, employee cost. This is likely to add to the margins further.
The company has been introducing new stock keeping units (SKUs) that is adding to its product portfolio. Also, it has outlined capital expenditure for the next three years to add capacity in cookware and cooker segment.
Profitability and outlook
Lastly, the company has rechristened PSK into Prestige Xclusive with the new stores to distribute cleaning solutions and other appliances. The company has focused on adding nearly 500 stores in the next three years. This shall help margins due to premiumization charged through these stores. Thus, I continue to remain bullish on the stock over the long-term.
Maruti Suzuki India Ltd.
I believe the worst is over for the company and one can expect improvement hereon.
For the passenger vehicle segment, the demand was impacted in H2 of 2018 due to high fuel prices, higher interest rates, an increase in insurance cost and lack of new product launches. It is found that the weakness was primarily due to the financing issues. Thus, I believe that the demand for PV was deferred and not destructed.
The correction in fuel prices, resolution of liquidity issues and new product launches are likely to support the demand. The medium-term view for the company looks bright particularly 2019 with the launches like New WagonR, Vitara, New Alto, and Future S Concept lined up.
Maruti is also the best placed Original Equipment Manufacturer (OEM) currently that can sail through the regulatory challenges (mandatory ABS, airbags, rear parking sensors and BS-VI) that are likely to start from April 2019. This shall support the top line for the company.
I also believe that the company will sustain its margins in the range of 13-15% over the medium term despite rising competition. This is primarily due to improving product mix, reduction in discounts, the rising contribution from new launch, execution of modular platform strategy, the increasing contribution from premium channels such as Nexa, the ramp-up of Gujarat facility, and reducing royalty.
Thus, the company continues to remain my favorable bet this election season.
Other favorable picks
What happens to the infrastructure sector?
I believe infrastructure as a sector has garnered enough coverage over the past few elections season as it involves government investment. However, this season, infrastructure isn’t a favored sector as some upside in execution is expected should the same government continue.
Also, implementation of poll promises is likely to reduce the availability of funds for infrastructure particularly at a time when the private spending is yet to take place.
To conclude, we can say that the markets are yet to price in the outcome of the general elections scheduled in May 2019 and thus it would be better if the investors add defensive and cyclical counters with a focus on large-cap stocks.
What if there is no stable government?
I believe a minority government is not necessarily bad for the capital market.
The polls are mere “interruptions” that won’t disrupt the nation’s economic structure or business cycle. The capital market eventually responds to growth and inflation.
Since 1991, every election has been preceded by a coalition government. Hence, the market had room to be hopeful for a stronger government.
However, in 2019, the market enters the election with a majority government. So, the market has to deal with the prospects of a weaker government at the center.
Piece of advice
An investor should buy beta and leverage names only if he/she believes in a better than expected election results. Also, an investor should focus on the second half of next year. I think H2 of 2019 could see the return of optimism that could kick the business cycle into high gear.
I believe the second half should offer a smoother ride.
Thus, in addition to large-cap defensive names from financials, FMCG, Information Technology and Pharmaceutical sector, an investor should keep an eye on opportunities the increased volatility during H1 may throw up.
Disclaimer: the views expressed here are of the author and do not reflect those of Groww.
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