Discretionary consumption stocks are suddenly doing a lot better than 7-10 days ago. That cannot be because of reopening?
Partly the reason is we have been going into this quarter wondering whether there will be a third wave or not. Fortunately, so far it has not happened. And with each passing day, there is greater confidence that even if there is one, it would probably be muted. That is the risk for the sector and that is also the opportunity.
If there is no big third wave, then consumption will rebound because there is sufficient momentum in terms of various kinds of festivals and unlocking events over the next three months, which will take these stocks up. Whether it is Trent, DMart, Voltas, the hotel companies, Thomas Cook or Chalet Hotels — all these companies are still trading at extremely reasonable multiples. If you rewind back to a couple of years ago and compare the pre pandemic multiples which were there, clearly the environment is now stronger simply because there is some amount of revenge trade.
Also there are salary hikes in the IT sector, textile sector and that is giving renewed confidence which was not there in that sector two years ago. IT is one of the biggest multipliers of consumer spend. Every one person hired by an IT company creates seven new jobs in the supporting industry. All these people are going to spend in the coming two months and so consumption stocks are still very well positioned and will do well.
You may want to play with the festive season on the markets but at these valuations, is it a good idea at all?
In terms of valuations, some of the companies are in a transformative stage. Jubilant is adding a number of new revenue streams, new businesses and new food items which are going to be delivered using their exceptional delivery platform. So a pizza company is also delivering biryani. These kind of things are very durable in nature.
Trent is doing its own things in terms of white labelling its products which is margin accretive. These are all company specific events. Voltas compressors have traditionally been imported, now it is a part of the Atmanirbhar PLI scheme. They are taking steps to make it domestically. Now when that happens in the coming quarters, it is not just this quarter good results but you will see margins improve because of import substitution. Also, a number of things have happened. One is coming out of unlock and there is a certain amount of rush up sales. Second, because of the PLI scheme, Atmanirbhar import substitutions as well as companies are recognising new revenue streams and new margin accretives will raise the revenue and the EPS estimates for some of these companies even next year.
Would you chance your arm in any of the proposed companies where the government has already indicated a strategic sale like Concor, IDBI Bank, Shipping Corporation or maybe SAIL?
Concor is big with all the golden quadrilateral as well as the related infrastructure spend. This as a space has always been under invested in India as a sector whether it is private players or public players largely because there is only a trip between point A and point B, there are a number of bottlenecks and therefore increasing their costs.
Logistic companies outside this country face fewer bottlenecks and that raises the margins. Concor is very well positioned.
Another one is IDBI Bank. The book is being cleaned up and that has a potential.