Be stock-specific in cement, cautious on FMCG: Amit Premchandani, UTI MF

The agri part of the rural economy may not be doing really well, while the asset creation part of rural economy or non-farm part of the rural economy is doing really well, Amit Premchandani, Senior Vice-President & Fund Manager, UTI MF, tells ET Now.

Edited excerpts:

Larger demand comes from the rural market versus the urban market. Now that has been true for many companies in the recent past and a lot of them have been guiding for a similar trend. What triggers would propel rural demand higher versus urban?

Over the last two-three years, the government is focussing on creating rural assets. So whether it is government road programme, the toilet programme or the rural housing programme, all are directed to create rural assets. Volume growth in FMCG companies have been better in rural India as compared to urban India. Auto growth, especially passenger vehicles, have seen higher growth in rural India and some pressure in urban India and now cement companies are also talking about demand largely coming from the low-cost housing programme.


All these are indicators that volume growth is largely coming from rural India as compared to urban India. However, on the other hand, we see significant pressure on the food inflation front as well rural wage front which indicates that the agri part of the rural economy may not be doing really well, while the asset creation part of rural economy or non-farm part of the rural economy is doing really well.

The government may have to intervene to give some boost to the agri part of the rural economy. We have been hearing of income transfer schemes being considered. We have heard the former CEA Mr Subramanian talking about universal basic income. However, given the fiscal constraint the government is in right now, it is very difficult to have a basic income scheme which is applicable universally.

There may be a directed income transfer scheme. Government as of now, has been moving towards progressive form of taxation where direct tax rates have moved up through surcharges while the indirect tax rates have been cut significantly, especially in mass consumption items through GST.

In an election year. it is very difficult for the government to increase direct tax rates further. The only possible scenario for the government is to curtail expenditure and focus on more universal basic income transfer scheme and allocate some part of the fertiliser or other agri related subsidies toward the income transfer scheme. That is what we expect the government to do.

Talk to us a bit about the FMCG pack. The results have been largely okay so far. The volume growth has been fairly healthy. What is making you a bit cautious with regard to the space? Is it high valuations or any other reasons?

FMCG as a sector is a very well managed sector with sound corporate governance practices. What concerns us is basically valuation. What we look at is what do the valuations imply in terms of growth, going forward. What we see is that many of the FMCG companies are implying growth significantly higher than the last decadal growth in terms of volume.

The two key themes in FMCG which drives the sector are penetration and premiumisation. Penetration in many of the sectors have gone up significantly while premiumisation continues. As a sector we are not negative per se. It is just the valuation which is kind of concerning to us.

What is your perspective on the cement pack? Given the headwinds there, how do you perceive this space? Is it a good idea to stay invested in cement as at this point in time?

We have to be stock specific in cement mainly because over the last one year, we have seen many companies announcing capacity expansion. The expectation was that as demand growth has picked up, we have seen double digit volume growth. It will be followed by pricing increase. However, that is not happening as everybody is bringing in new capacities. There are pockets of country where we have seen some price increase. For example, northern markets have seen some price increase but large part of India have seen pressure on pricing while over the last one year crude prices have moved up and hence the cost pressures have been very high on the cement companies. It is important to note that 60% of the cost of a cement company is linked to crude or crude derivative and we have seen that cost metric inching up.

In the last two months or three months, we have seen crude prices correcting so we may see some 3% to 4% decrease in cost per tonne for the cement companies but the other concerning factor remains that capacity utilisation is still at 70% for the cement sector per se and at that percent of capacity utilisation we are seeing lot of capacity announcements happening hence pricing power is getting eroded for the cement as a sector. So we will be very much stock specific on the sector rather than giving a sectoral call on that.