market: 5 stocks Abneesh Roy is bullish on for near term

I remember talking to you last quarter as well when the first time after several quarters some of these companies started giving out a relatively better kind of commentary on outlook. This time when HUL commentary also after the 4% kind of volume growth came in, you must have already started recommending your clients last quarter onwards to get into some of these names. This trade is now getting strengthened. What are your thoughts now? Is it okay to get into some of these names now as well?
Abneesh Roy: Yes, we think the sector will continue to do well. There can be minor profit booking given HUL stock is up some 25% in the last four months. It was yesterday at 52-week high. But we do see next four-five years being good for the sector because of three-four reasons.

One, of course, this government is a coalition government and next five years visibility on the rural stimulus programmes and tax cuts for the salaried class is there and yesterday also, for example, we did see 2.66 lakh crores rural development, 1.5 lakh crore for agri and there is a tax cut for the lower end in terms of the new tax regime, so 17,500 higher tax.

So, these are definitely something which is going to continue and everything does not happen in union budgets. For example, NREGA’s outlay, for example, is something which is on tap.

So, even if the budget does not increase too much, that is based on the demand and last two years we have seen that the actual spends in NREGAs are much higher than the initial budgets. Second, of course, is, MSP hikes happened a few weeks back that was on the higher side versus the last four-five years average and a lot of the states also are doing a lot of stimulus programmes. For example, Maharashtra is going to elections and you must have seen the huge announcements being done for the women, for the youth, for the lower end of the rural and urban. Same thing is happening in Haryana, Jharkhand. It happened even in Karnataka, for example. So, you have to see union plus the state, both are doing. Second is definitely we see pricing coming back for sector. So, HUL, for example, in Q1 also, there was a 2% negative pricing. We see that worst is behind in terms of pricing for the sector and for HUL.

And in second half, we do see HUL taking the price hikes. And after that, the next one year, we will see around 3% price hike coming back for HUL and for most of the other players also.

Also, because of very high inflation, initially, two years back, and then equally sharp deflation, it was very tough time for the number one player because then what happens, local players do come back. The good part is that has also now ended in Q1. So, local players, we see losing market share back to the market leaders in each category. For example, HUL is currently leading in 55% of the portfolio. In good times, it leads around 70-75% of the portfolio, it is gaining market share, we see that coming back.

In soaps, for example, very good disruption. So, in palm oil, they have reduced 25% palm oil in Lux and Lifebuoy and similarly, in tea and other parts of the portfolio also, we see HUL winning back market share. So, we are positive on the sector. We are also positive on HUL.

Are you then suggesting and recommending your clients to buy this dip? And if yes, which are the top recommendations from the entire universe of stocks that you track closely?
Abneesh Roy: Yes, so we are definitely recommending investors to buy on dips and we are positive on HUL. We have a target price of 3375. We are positive in fact, for almost the entire consumption space for last two-three months.

If you see entire consumption space has rallied, it is not that only one company will gain when the rural recovery happens or even one company will gain because the pricing will come back, the entire sector sees that benefit.
Yes, from a valuation perspective, HUL still there is a comfort, even in ITC there is a comfort, in Asian Paints, there is a lot of comfort.

And if you see they have taken one more round of price hike yesterday, but that was in the balance part of the portfolio, it was not a second hike in same part of the portfolio.

We expect that Asian Paints will see more hike in the coming weeks because that is the pricing power and they want to have margins in a more comfortable band of margins.

So, yes, we are positive on these three names. From a growth perspective, we remain positive on Nestle, we remain positive on Dabur, we remain positive on most other names also, but generally in terms of comfort it is higher in HUL, ITC and Asian Paints currently.

Just a quick word on United Spirits. I mean, the numbers have been decent. How was the call and more so their strategy which they had given out a few years back, appears to now coming to fruition. Do you see this momentum to continue? What is your long-term target there?
Abneesh Roy: Yes, we are positive on the space and we are positive on the United Spirits, mostly from a longer-term perspective. Valuation comfort is a bit low there. Yes, Q1 results, the expectations were quite limited given the impact of elections in terms of dry days and lesser excise officers available in terms of the production.

In spite of that, the 5% volume growth in the P&A and 10% sales growth in the P&A, I think that is a decent improvement. The bigger surprise was on the margin.

So clearly, gross margin was as per expectation, but they really managed the EBITDA margin and cost control in terms of the other cost and the employee cost quite well, which I think is a good achievement and they also did two acquisitions yesterday.

V9 Beverages, and the Indie Brews and Spirits, so that is in the craft spirits and that is also in the zero alcohol, those two companies.

I would say that this company is doing the right things, closing the white spaces and also focusing on the premiumisation quite decently.

One more trigger for the stock will be essentially what happens in Andhra Pradesh. We expect a new liquor policy very soon because the government had put out in manifesto lowering the liquor taxes and improving quality. And another trigger for United Spirits would be essentially what happens on the UK FTA.

Of course, UK FTA has been happening for the last two-three years, so difficult to put a timeline. But the only issue here is the United Spirits valuations is not cheap.

So, any investor has to take a one to two years call rather than a very short momentum. But yes, results were on the positive side.