Food companies are safe stocks to buy unless you are speculating: Sunil Alagh

In an interview with ET Now, Sunil Alagh, Chairman, SKA Advisors, says it is an election year and Mr Modi is bound to make it work. He sees a big boost in the second half.

Edited excerpts:

Pro-growth stance and the sops from the government are a sure shot recipe for strong rural demand. Do you see rural demand outpace urban in the coming years?

At least for the next one to two years, I see it outpacing because it was outpacing till last year and then it became a little static and the semi-urban and urban took over. Now with the good monsoon and the government schemes of giving the farmer that 100 plus 50% as well as the health scheme, we are going to see rural demand go up. In an election year, whether we like it or not, a lot of money is given to the poor whether through legal means or otherwise.

I see a massive increase in rural demand his year compared to last year and the year before when demonetisation and GST slowed things down. All that is settled now. A good monsoon is all that is required and you watch that how the rural demand will go up because people in the rural markets do not really save the money they get. They tend to spend and if spending starts, then consumption goes up and if consumption goes up, then it automatically helps industries.

Most food companies’ stocks never go up or down too much unless it is very badly managed. They are the safe stocks to buy unless you are speculating. If you are looking at 1-2-year period, most food companies are great to go with and this includes the other FMCG companies as well.

While the sops from the government have already come in the form of higher MSPs and infrastructure spends, when do you see these have a meaningful impact on rural income because that will translate to spends and will benefit FMCG companies?

The first half if going to be about hope and the next half is going to be about reality because the money to the farmers are going to come in only after the monsoons. The 100 plus 50% and also the health scheme. That is going to start from October. I see the first half will come in because either we have good rains and that will bring hope and then the second half comes in when reality touches. If those two schemes are badly executed, then you got to take another review about rural demand but as things stand there is no reason why they will be badly executed.

It is an election year and Mr Modi is bound to make it work. I see a big boost in the second half.

The growth for FMCG companies in late 80s and early 90s was a function of reach. Now reach and penetration is no longer a challenge, Do you think now the challenge is only going to be about generating volume growth?

Yes, because initially it was the width of distribution which was required now we need depth. There are two ways to go about it. One, if you are buying only one soap or one packet of biscuits, you will buy two. The second is if you are buying the same thing but you say now I want to buy something better. Anyway, the semi-urban areas are already looking at health products. Look at Patanjali’s growth, look at all the companies that are there which are promoting and if everyone pushes for this together, then you are going to see a move up at an aspirational level.

Which are the two or three categories where you are in general very bullish on? Where do you think there is going to be 7-8% volume growth for next two or three years?

It is dairy and agricultural products including pesticides, insecticides and tractors. I am not a great market player but I would say these segments are safe bets in the sense that there nothing can go wrong.

No food company is going to do badly unless it is badly managed, as I said in the beginning. You will see the whole sector grow.

I bet you chalked out that list of which companies are likely to do better than the others within FMCG sector. What are the top three stocks that you believe can still be bought?

ITC is one company that is going more and more on food and less on tobacco.

Also, there are going to be a lot of IPOs. The second half of the year will see a lot of IPOs of privately held food companies. That will give the investors a lot more options rather than just sticking to one or two of the traditional companies which have already become highly priced and therefore the growth prospects on the pricing may be a little lower.

I am almost sure that there will be at least three or four food companies which will go in for IPOs in the second half and you should wait for that.

What are you mapping in terms of rising raw material prices and how that may impact operating profit margins for FMCG companies?

Well my advice to all food companies is that do not lose market share just because your profits come down in one year. You will make up in the second and third year because once you lose market share and then getting it back is very tough because all competitors are coming in and therefore even if certain companies maintain market share and drop their profits I am sure the market will look at it aggressively and say look this company knows where it is going.

I do not see a drop so unless you make a large margin to protect your market. Everybody should understand why that company is doing it. I do not see there is a pressure to let the market forces play because anyone who is unable to withstand the pressure is going to collapse.

You must go back to what the consumer can afford and then make sure you have products which you can give and not develop the products the other way around and hope that the consumer buys it.