Budget 2019: Are the beaten-down auto and FMCG stocks good investment bets?

The outbreak of IL&FS crisis in September 2018 and the subsequent liquidity squeeze in the system derailed the growth story of various sectors of the economy. While the auto industry continues to move in reverse gear, other consumption-related sectors such as consumer staples and FMCG (fast moving consumer goods) also seems to be in the limbo owing to an array of headwinds.

The near-term outlook, too, looks gloomy for the entire consumption theme, though things are likely to change for better in the second half of the fiscal year 2020 (H2FY2020), analysts say. A normal monsoon and a consumer-centric Budget in July would act as a catalyst for consumption revival, they believe.

That apart, accommodative stance of the Reserve Bank of India (RBI) and the possibility of a cut in interest rates and its transmission is the other ingredient that can spur growth over the medium-to-long term.

“The rural economy is reeling under a crisis. Rural wage growth has been quite weak and low agricultural prices have taken a toll on farmers’ incomes. We think spending should be prioritised in rural and affordable housing given the high stress in these sectors,” said Aditya Narain, head of research, institutional equities at Edelweiss in a pre-budget note.

A clear evidence of the economic slowdown is visible in the auto sales since the past few months. Combined sales of top six passenger vehicle makers dropped 16.3 per cent to 206,115 units in June 2019, as compared to the June 2018, data show. Similarly, the fast moving consumer goods (FMCG) sector has also been impacted with sales remaining muted for most players in the March 2019 quarter (Q4FY19).

At the bourses, stocks of both these sectors have underperformed. On a YTD (year-to-date) basis, the Nifty Auto index has slipped 13 per cent, while the Nifty FMCG index has slipped 3 per cent, ACE Equity data show. In comparison, S&P BSE Sensex and the Nifty50 have gained around nine per cent each during this period.

“Unless the government and the RBI acknowledge the severity of the crisis of confidence that is plaguing the economy, the situation will only worsen. It is high time that the two acted in congruence and unveil specific measures to kick start growth in the moribund sectors like NBFCs, autos, real estate,” cautions Ajay Bodke, chief executive officer and chief portfolio manager (PMS) at Prabhudas Lilladher. 

WHAT LIES AHEAD

So, will the Budget lay out a roadmap to revive the economy and spur growth? Should you buy these consumption-related stocks ahead of the Budget proposals?

“Both FMCG and auto sectors are structural buys that are currently going through a cyclical slowdown. Between the two, my preference is for consumer staples and discretionary sectors rather than the autos. Autos are not out of the woods yet and need more time for recovery, says Harendra Kumar, managing director and head of institutional equities and global research at Elara Capital.

Consumer staples and discretionary sectors, Kumar says, should benefit from government spending, possibility of a rise in rural income and budgetary benefits in terms of income tax.

In this backdrop, analysts suggest investors remain selective and look for companies that have a diverse portfolio, strong market positioning and cater to a diverse set of economic strata – both in urban and rural India.

In the FMCG space, Hindustan Unilever (HUL), Britannia, Pidilite, and Marico are the top picks of Edelweiss Securities. Analysts at Sharekhan, too, are positive on HUL and Britannia in the large-cap space, while Marico is their preferred bet in the mid-cap universe.

While most analysts agree that a full recovery in the auto sector is still a distant thing, those at Motilal Oswal prefer four-wheelers over the two-wheeler segment and commercial vehicles (CVs). Maruti Suzuki India, Motherson Sumi among the large-caps; and Ashok Leyland, Exide Industries and Endurance Technologies among mid-caps are their top picks.