itc: Dipan Mehta explains why he would prefer L&T to ITC

“While we are positive on consumer spending over the medium to long term, the best way to play it would be through non-FMCG stocks,” says Dipan Mehta, director, Elixir Equities.

HUL performed well, maintaining a solid 4.5% regardless of management’s post-earnings comment, although it was in line with estimates hinting at further pressure on margins. As far as FMCG goes, these are known devils. Would the market have anticipated this and taken them into account?
You’re right, and I wouldn’t rule out some amount of short coverage taking place in HUL at this point. It was an underheld stock and there was always concern that growth would slow. Many of the categories in which they are present have reached the level of maturity and with the type of inflationary pressure we are seeing in this country, there are very strong headwinds for FMCG companies like HUL.

While we are seeing a rally at the moment, I am not excited about HUL’s medium to long term outlook. I know there are many loyal shareholders of HUL who have been sitting on earnings for many years, but such rises are a good opportunity to leave HUL and buy other blue chip companies with equivalent levels corporate governance standards and strong balance sheets but have much higher growth rates.

Go with GCPL or would you say diversify into ITC?
I’m not that bullish on any of the FMCG companies at this point, including ITC. One is better off in some of the other big companies which could be technology, banking and even capital goods. Something like Larsen & Toubro which has more sustainability and earnings growth than the FMCG pack and the same goes for many software companies as well as large cap banks like ICICI, Axis, Kotak and SBI.

They deliver significant earnings growth over the next three to five years, far beyond what FMCG companies have done. Even if you want to play consumer history, FMCG is no longer the way to play it. There are many other micro themes, as well as cap micro stocks to consider. We could look at real estate, automobiles, building materials, appliances, entertainment and travel. All of these are also heavily dependent on consumer spending and this is where the increasingly higher share of the wallet goes to the consumer and not so much to the FMCG. While we are positive on consumer spending over the medium to long term, the best way to play it would be through non-FMCG stocks.

Is it at around Rs 250 still a good buy?
Not sure if this is a good buy as the stock has rallied significantly and it looks like the trade is on the move at this point. So, no need to jump in, but if you are already invested at lower levels, then take advantage of the rally we are seeing right now. The next few quarters will be very interesting for Indian hotels and they could see decent profit growth as they also try to repair their balance sheets.

Overall performance ratios may also improve. But beyond 12-18 months, I’m not sure about continued earnings growth. My issue is with the longevity of earnings growth because ultimately what we’re seeing is a rebound in travel and at some point that’s going to flatten out, but going forward if that’s going to be a consumer spending environment and if it will be rental rates and air travel, then that will definitely impact travel once the pent-up demand is over.

Either way, the hotel business is tough and rates of return are generally low and once you start entering the off season the operating levers start to work against you. So I’m not very positive on the long-term outlook for the hotel industry, but there’s no denying that the next six to nine months could be very positive for this sector and this trade rally that we’re seeing in Indian hotels and some of the others, hotel stocks certainly still have a long way to go.

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