Consumer Discretionary: Both consumer and capex stocks are making a strong comeback; look for substitute stocks for defense and railways: Devang Mehta

Devang MehtaDirector of Equity Advisory, Generate private wealthsays a combination of sectors related to capital expenditure and consumption And certain credit growth sectors will be a good investment portfolio if someone has a horizon of one and a half or two years. Mehta further says that one needs to look at power games as bearing companies for railways and defense actions.

What are you doing in the markets at the moment? Are there any new stocks you have been able to recommend to your clients? Any new ideas?
Devang Mehta: I will talk more about themes and sectors than ideas. I will give some examples as I go along. We believe that both sides of the market, whether it is consumption or capital expenditure, have come back strongly. After the elections, after the budget and after this volatility that we saw a couple of weeks ago during the yen carry trade, the market has been getting better and better. So, sectors that were not performing, whether it is FMCG companies, automobile companies and even financial services companies, have seen an increase in volatility. discretionary consumption companies like Titan and TrentoThey have put up a good set of numbers. Trent was a market-beating number, which nobody had imagined and this has been one of the stocks in our portfolio for most of our clients. It has also put up a great set of numbers. So, again, certain sectors have started doing very well, even rural consumption. Even tier II and tier III cities have started picking up a bit and the capital expenditure side of the market, which people had started writing off like power, power ancillaries, capital goods and infrastructure, have come back.

So both wheels of the economy are working very well and credit growth is also picking up slightly. We know there is a problem with deposit growth in banks, but most of the money is coming into the capital markets and wealth management firms. This is where the financialization of savings have begun.

In my opinion, a combination of sectors related to capital expenditure and consumption and certain sectors related to credit growth will be a good investment portfolio if someone has a horizon of one and a half to two years.Where in the consumer spectrum are you comfortable investing fresh money? The K-shaped recovery has worked very well on the whole premiumisation issue since COVID. Is it time to go bottom-up and get exposure to rural areas?
Devang Mehta: Yes, you need to do it, both from the bottom and from the top, because you have to first understand the issue very well, if the issue is going to work well, if the sector is going to do well. So, coming back to the business world, our favourites are the companies in the consumer discretionary sector, like Titan, Trent, Zudio, Westside and Zara. They are kind of representing aspirational Indians.

Even Titan has everything from watches to jewellery, which is the biggest segment where they are trying to expand their market share. It is the most trusted name there, right down to Fastrack and other watches, as well as Taneira, which is the saree brand, which is in all the malls they are now setting up.

It is not just a retail strategy but also a consumer discretionary strategy, an Indian aspirational strategy. Also, most of these companies are trading at slightly higher valuations, but they demand that higher valuation because they offer those kinds of numbers and the management commentary is always very encouraging.

In my opinion, Titan and Trent are already the models of discretionary consumption. In addition, hotels play a role… Hotels in Indiaand EIHwhere the average price of rooms has been increasing, demand is growing by 13% to 14% and supply by 3% to 4%. I think that the hotel sector also has a lot to improve in the next two or three years, once again, thanks to the increase in discretionary consumption and luxury consumption.What are you recommending right now for defense assets, obviously, for those who have money?
Devang Mehta: The most important thing is that now we have to distinguish the men from the boys when we talk about issues like defence and railways, which have had dream returns over the last three or four years. The stocks have given 10, 15 and 20 times returns. Yes, there are some profits to be made, maybe at least 15-20% profit. Now is the time to get deeper into brokerage operations.

A simple example is that when we talk about railways and defence, we forget about bearings, which are needed everywhere. Motion management will be needed everywhere and companies like Timken India and other bearing or motion management companies that supply these products and also manage annual type projects for them. They also take care of the maintenance. And if they need to be replaced, they are the only companies you can turn to to replace them.

These are companies that are not only niche in terms of their products and services but also have an operating profit margin of around 22-23%. So, these are the companies that we recommend, which are more indirect bets. We know that the business is going to thrive for the next three to five years as capital expenditure increases. These are indirect bets that one should consider while we are talking about defence and railways.

What are your other current overweights or underweights in this market?
Devang Mehta: In general, we have bet on growth in manufacturing, motion management, energy efficiency and automation themes. These include energy or energy auxiliaries or even capital goods. Very unique companies and very decent indirect bets. I used to talk about Siemens to Hitachi Energy To Timken India for Pitti Engineering. Engineering companies, even R&D companies like L&T Technology Services, which are core to their industry. The most important part that we focus on when we acquire such companies is whether the size of the opportunity is huge or not.

So the opportunity size has to be large. The company has to have a dominant market share and it also has to offer stress-adjusted returns. Those are the sectors we are generally in. And of course with that, we also really like consumer discretionary, which again is delivering great numbers and strong commentary, as well as generating free cash flows.

What about cars?
Devang Mehta: The industry has been through a lot of turmoil, not just in the recent past but also in the last four to five years, from COVID to immigration rules that were applied to insurance which deterred many two-wheeler riders. This industry has gone through a lot of turbulence and now most of the companies that are maintaining their market share are getting rewarded.

Companies like it Marutiwhich has traditionally been a very high market share company, yes, of course, it has lost a bit of market share to its competitors, but, once again, it has come back with what it does best, petrol engines and maybe even a bit of hybrids. But without getting into the area where they are not so competent, so that has worked very well.

Demand for cars has increased. Per capita consumption of cars in India, be it two-wheelers or four-wheelers, is increasing. As far as discretionary consumption is concerned, the first thing that comes to mind for an inspiring Indian or a person moving up the ladder is that he wants to buy a new vehicle. The biggest revelation for me is that earlier people used to buy hatchbacks and sedans and now SUVs are the best-selling cars across the spectrum.

So, premiumisation will happen. Companies like M&M and Maruti will surely benefit, even two-wheelers like MotoCorp HeroTVS will also benefit. The biggest beneficiaries will be the auto component manufacturers. You have to be selective in that sector because you can’t be in everything or anything. But these are sectors that will perform very well in the next two or three years.