5 sectors that can beat FMCG stocks hands down with a 3-5 year outlook

Dipan Mehta, Director, Elixir Equities, says there are a whole host of other sectors and sub-sectors which are looking very interesting and are moving up the value chain where premiumisation, shifting from unorganised to organised and higher retail spends are driving growth. There is aviation as well as hospitality. Healthcare, entertainment, retail, all are doing exceptionally well. There could be a little bit of turbulence here and there but by and large, these are secular growth stories and one could buy the leaders over there.

Mehta expects these companies to outperform the FMCG pack by a huge mile with a 3-5 year outlook.

Ambuja Cements came out with its earnings. The volumes were above estimates at around 8.1 million tonnes, but there was not a big jump up when it comes to operational performance. The Street was banking a lot with respect to margin expansion and a decent in line performance?
Well, that is right. On the face of it, the numbers appear to be amongst the better ones within the cement industry. But our view on cement is negative and the reasons are quite clear. While they are seeing decent volume growth, strong double digit mid teens type of volume growth across many of the quality players, the inability to pass on cost increases because of competitive intensity is clearly a very big cause for concern.

All the cement companies are adding capacity at breakneck pace. At some point of time, we are going to have a glut situation or severe under capacity utilisation, which will impact the profit margins. Keeping that scenario in mind, we like to avoid cement. One is better off buying the cement consumers; they are in very good shape.


The real estate companies are reporting record sales and looking at very good times going ahead. And then infrastructure, engineering construction companies, road builders, ports and also the infrastructure construction companies are sitting on record order book positions and a very good earnings visibility for the next two-three years, if not more. As the government spending is set to increase prior to elections, cement consumers should be preferred over cement manufacturers.

Cummins Inc came out with their outlook saying that they have raised the full year guidance to 15-20% for India as well. They have said that the total revenue including the JV is up by about 21%. We are anticipating Cummins India numbers later this month. What is your outlook if you track this company back home?
Cummins is in a very interesting space. We have been very positive on the entire engineering capital goods space. Cummins is one of the leading engineering companies. It is into gensets and diesel engines. Diesel gensets are absolutely world class and they have the advantage of exporting to other Cummins subsidiaries as well on a transfer pricing basis. The valuations are reasonable compared to historically what the stock was traded at.

After many quarters of sideways to slightly disappointing performance, last quarter and this quarter may be quite impressive. A lot of the cost increases have been passed on and now we are seeing subdued raw material trends and that should benefit the margin management for the company.

The way we are seeing infrastructure projects take off, I think there is going to be good demand for the company's projects or products as well so very positive on Cummins per se. And it is a premium player MNC company and always has traded at a very high price to earnings multiple so let us not get too impacted by that. But on the whole, the next few quarters look very interesting and positive for Cummins.

The traditional consumer names have been underperforming for a while. Are you a fan of HUL, ITC, Nestle, Britannia or any of these old names?
I was surprised with Nestle's numbers and that is perhaps because it is in a category where there are still adequate levers for growth, a little bit of under penetration and they have a larger footprint to capture within the rural markets. But HUL and some of the other FMCG companies, in a lot of the categories they are operating in, have reached maturity and volumes are going to be pretty tepid going forward. So I am not that optimistic on FMCG per se. There could be selective exceptions to that industry but by and large, if you want to play the consumption theme, you have to move away from FMCG.

There are a whole host of other sectors and sub-sectors which are looking very interesting and are moving up the value chain where premiumisation, shifting from unorganised to organised and higher retail spends are driving growth. There is aviation as well as hospitality. Healthcare, entertainment, retail, all are doing exceptionally well. There could be a little bit of turbulence here and there but by and large, these are secular growth stories and one could buy the leaders over there.

I expect these companies to outperform the FMCG pack by a huge mile with a 3-5 year outlook.