Analysts mostly prefer domestic plays beside select films with foreign exposure.
Despite stocks such as Hindustan Unilever (HUL), Britannia, Havells and M&M Financial running up steeply after the Union Budget and March quarter results, they remain favourites of fund managers and brokers.
The preference for these has increased after the event of Britain exiting from European Union (EU) or Brexit, as they are resilient to the likely impact of foreign exchange (forex) fluctuation on the rupee in the coming days and are unlikely to be impacted by any adverse situation that might arise in the United Kingdom or EU.
The growing negative view on sectors such as information technology (IT) and metals and, to some extent, automobiles given their forex vulnerability, has also increased the popularity of domestic consumption-driven stocks.
With this, analysts do not rule out fresh rounds of re-rating for these stocks, as they are increasingly reckoned as ‘safe-bets’ post the Brexit, which they say, justifies their expensive asking rates.
Convincing tailwinds such as monsoons, consumption push from the seventh pay commission and OROP payouts, apart from government spending on infrastructure and from visible signs of improvement in earnings as seen in the March quarter, also add strength to analysts’ optimism on consumption-oriented stocks.
Ajay Bodke, CEO, Prabhudas Lilladher, feels monsoon will be the highlighting factor for these stocks and expects larger allocations to domestic-focused stocks given that they would be the bigger beneficiaries of above-normal monsoon.
But, with the possibility of markets headed for a few sessions of weak trade, Dipen Shah, head-private client group research, Kotak Securities advises investors to utilise any secular fall in the market as an opportunity to accumulate these stocks.
“One must look at them with a medium to long term perspective”, he adds.
U R Bhat, managing director, Dalton Capital Advisors, reiterates as these stocks have almost ‘zero’ exposure to exports or imports, they have the potential to stay ahead of the rest in terms of earnings growth and stock performance as well.
He advises investors to look at health care stocks with no regulatory issues particularly that of the USFDA.
“Slowdown cannot affect the health care stocks whether in India or elsewhere. Now may be a good time to buy quality pharma stocks from long-term perspective”, he affirms.
Brokerage arms of Deutsche Bank and HSBC also have some pharma names in their list of picks (see list).
But there is a word of caution as well. The recently concluded March 2016 quarter saw companies in the FMCG and consumer discretionary sectors such as HUL, Emami, Marico, Havells and Whirlpool report decent margin expansion (100-150 basis points year-on-year).
This may moderate in the coming quarters as input costs are witnessing some up-move in their prices.
Likewise, retail inflation hitting a two-year high also raises concerns of a possible pullback in consumer spending.
The silver lining, however, is the fact that despite retail inflation rising to 5.76 per cent in May, it is still 50 per cent lower than 2013 levels.
A report by Emkay Global Financial suggests that government intervention through consumption expenditure, support prices and procurement policies will play a vital role in determining the course of retail inflation.
Regardless of this, stocks such as HUL, Marico, Page Industries, M&M Financial Services and Whirlpool remain the top picks of brokerages.
Experts also advice investors to be very stock specific even within the recommended sectors.
They suggest a bottom-up approach will yield better results in an environment of volatility and uncertainties.
Additionally, stocks from the agri-input and paints space as well as financials/ banks focussed on retail and niche segments and select auto and oil marketing companies are also expected to outperform.
BROKERAGE VIEWS
Ambit Capital: Five stocks that have highest potential for EPS growth are Marico, Berger Paints, Page Industries, TVS Motors, Supreme Industries
Citi: Our constructive stance from a one-year perspective remains - earnings growth remains key (expect 14 per cent for FY17).
Near-term focus remains on monsoon, GST, inflation, pay commission, etc. Key changes to portfolio - (a) Increasing over-weight on BPCL & Emami; (b) Taking some profits on Maruti/Dish TV - still small over-weight; (c) Trim weight in SBI/ICICI Bank; other minor tweaks
Deutsche Bank: At this point of time, we advise investors to look at sectors/stocks that are most insulated from global macroeconomic uncertainties and the associated contagion risks.
Utilities, pharmaceuticals, tractors, oil marketing companies, cement and consumer staples appear to be the most insulated sectors in India.
Stocks that appear to be most insulated include: Sun Pharma, Lupin, Aurobindo, ITC, HUL, Titan, Nestle, NTPC, M&M, Hero MotoCorp, Shriram Transport, HDFC Bank, IndusInd Bank, BPCL & HPCL.
Geojit BNP Paribas Financial Services: In such chaos, the focus will shift towards businesses such as consumer durables & non-durables (FMCG) and two-wheelers where domestic business is likely to provide stable earnings growth.
Sectors and stocks that are likely to benefit from good monsoon and implementation of 7th Pay Commission will outperform.
The fall in oil prices will benefit oil marketing firms and importers of oil-oriented raw material such as chemicals and paint.
Kotak Institutional Equities: We increase weight on M&M and Tata Motors and reduce on Tech Mahindra and Reliance Industries among large-caps.
Model mid-cap portfolio remains unchanged with key themes being agricultural productivity, discretionary consumption, economic recovery and niche lending players.
Religare Securities: Brexit could cause marginal decline in Nifty in the immediate term but domestic cues will take over quickly.
Bajaj Auto, M&M, YES Bank and IndusInd Bank; In the short term, agri and consumption counters to remain favour, avoid companies with the UK exposure.
