India's consumer stocks have edge over capex-linked ones after shock poll verdict

Colgate-Palmolive (India)

05/06/2024 07:35

By Bharath Rajeswaran
       MUMBAI, June 5 (Reuters) - Indian consumer-focussed
companies are likely to shine, while capital spending-linked
firms could suffer as the government shifts its policy focus to
support lower-income segments, fund managers and analysts said
on Wednesday, a day after a surprise result in the national
elections.
    Prime Minister Narendra Modi's Bharatiya Janata Party (BJP)
secured a third term in government but without a majority of its
own, confounding expectations and raising concerns over the pace
of reforms and the priority of investment-led growth.
    Indeed, the fast moving consumer goods (FMCG) index
 .BSESCGIP  rose 0.15% on Tuesday, the only bright spot in the
stock market carnage, which included a 12% plunge in the capital
goods index  .BSECG .
    FMCG stocks continued their rise on Wednesday, climbing
5.2%, while capital goods companies slid 1.5%.
    The BJP lacking a simple majority raises doubts over a
stable government and policy-making styles, said analysts at
CLSA.
    The brokerage remained "overweight" on consumer staples and
said ITC  ITC.NS  was its preferred pick in the sector.
    CLSA is also positive on banks, IT and insurance companies,
and replaced Larsen & Toubro (L&T)  LART.NS  with HCLTech
 HCLT.NS  in its India focus portfolio.
    The blue-chip Nifty 50  .NSEI  and Sensex  .BSESN  indexes
tumbled nearly 6% each on Tuesday, their worst one-day
performance since March 2020.
    Despite the plunge, valuations of cyclicals are expensive,
said Nuvama Institutional Equities, preferring
consumption-linked stocks over capital expenditure-linked
sectors.
    It expects weak demand to weigh on private capex and
government capex to decelerate.
    The Nifty 50 is currently trading at 19 times 1-year forward
expected earnings (PE), below the 10-year long-term average of
20x.
    Consumer staples like Hindustan Unilever  HLL.NS , Britannia
Industries  BRIT.NS , Colgate  COLG.NS  are trading at a PE of
52x, 51x and 49x, respectively, lower than their long-term
valuations.
    Conversely, capital goods companies like L&T and Siemens Ltd
 SIEM.NS  are trading above their long-term valuations.
    "Days of paying any multiple for stocks in industries where
big reforms are expected are gone," said Ashutosh Tiwari of
Equirus Securities, cautioning investors to focus on sectors
"where earnings visibility is more certain."
    Equirus identified rural recovery as a theme that could
benefit in the near term and picked building materials, consumer
durables, automobiles and industrial consumables as its
preferred sectors.
    "The election result is likely to lead to a more balanced
market; risk-reward in large caps and underperforming sectors
like banking and consumer appears more favourable," said Rahul
Singh, chief investment officer of equities at Mumbai-based Tata
Asset Management.
    "More specifically any moderation in the capital spending
outlook in favour of consumption support can further drive
sectoral preferences going toward," Singh said.
    The change in market sentiment, he added, may lead to
"greater scrutiny and valuation discipline" in sectors like
capital goods, power, defence and manufacturing.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Performance of India's capital goods, consumer stocks over the
last year    https://reut.rs/4bIRJJn
Brokerages' preference list after India's election results    https://reut.rs/3Rf1IOm
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Bharath Rajeswaran in Mumbai; Editing by Savio
D'Souza)
 ((bharath.rajeswaran@thomsonreuters.com; +91 9769003463;))