Dipan Mehta on why he would prefer L&T to ITC

“While we are positive on consumer spending in 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, holding up a solid 4.5% irrespective of the management commentary after the earnings even though they were in line with estimates hinting at further margin pressure. When it comes to FMCG, these are known devils. The market would have anticipated that and priced them in?
You are right and I would not rule out some amount of short covering taking place in HUL at this point of time. It has been an under owned stock and there was always fear that growth was slowing down. A lot of categories they are present in have reached maturity level and with the kind of inflationary pressure which we are witnessing in this country, there are very strong headwinds for FMCG companies like HUL.

While we are seeing a rally at this point of time, I am not that enthused about the medium to long term prospects of HUL. I know there are many loyal shareholders of HUL who have been sitting on profits for many years but such upswings are a good opportunity to switch out of HUL and buy some other blue chip companies with equivalent levels of corporate governance standards and excellent balance sheets but which have got much higher growth rates.


Go with GCPL or would you say diversify into ITC?
I am not that bullish on any of the FMCG companies at this point of time, ITC included. One is better off in some of the other larger businesses that could be technology, banking and even capital goods. Something like Larsen & Toubro, that has more sustainability and growth of earnings than the FMCG pack and the same holds true for a lot of the software companies as well as the largecap banks like HDFC, ICICI, Axis, Kotak and SBI.

They generate significant growth in earnings over the next three to five years, far higher than what the FMCG companies have been doing. Even if you want to play the consumption story, FMCG no longer is the way to play it. There are many other micro themes, micro cap stocks as well to look at. One could look at realty, auto, building materials, appliances, entertainment and travel. All of these are also very much dependent on consumer spending and that is where higher and higher share of the wallet is going from the consumer and not so much for FMCG. While we are positive on consumer spending in the medium to long term, the best way to play it would be through non-FMCG stocks.

Is Indian Hotels at around Rs 250 still a good buy?
I am not sure if it is a good buy because the stock has rallied significantly and it seems to be a moving trade at this point of time. So, no point getting into it but if you are already invested at lower levels, then ride the upswing which we are seeing at this point of time. Next few quarters will be very interesting for Indian Hotels and they may report decent growth in earnings as they try and repair their balance sheet also.

The overall return ratios also may improve. But beyond 12 to 18 months, I am not sure about the continuance of growth in earnings. My issue is with the longevity of the earnings growth because end of the day, what we are seeing is rebound travel and at some point of time, that will flatten out but going forward, if this is going to be a consumer spending environment and if these are going to be the rental rates and the air flight, then certainly it is going to impact travel once the pent-up demand is over and done with.

In any case, the hotels business is a tough one and return ratios are typically low and once one starts getting into the slack season, then the operating leverages start to work against you. So I am not that positive on the long-term prospects of the hotel industry but there is no denying that the next six-nine months could be very positive for this sector and this trading rally we are seeing in Indian hotels and some of the other hotel stocks certainly has got some more legs to go.