ET NOW EXCLUSIVE | In a sweeping outlook on Indian equities, Market Expert Nirmal Bang’s CEO Rahul Arora flags a major shift in market leadership — from a global “Magnificent Seven” tech correction to a surprising FMCG slump and a brewing boom in banking and financials. Arora outlines why consumer discretionary stocks, select FMCG names and a strong BFSI basket could define the next leg of India’s market rally.
Apple, Microsoft, Amazon, Alphabet, Meta Platforms, Tesla and Nvidia are constituent of Magnificent Seven stocks.
Weakness of US equity market
On the weakness of US equity market and mag seven shakeoff, Arora said, “Yes. So I think, obviously, the one trigger that the Indian markets had going into the Bihar elections was the possibility of hitting a new high, and unfortunately, the Dow spoiled that party by being about 600-650 points down the previous night.”
“If you look at valuations in the tech sector — whether it was Apple or Nvidia — they were becoming a bit excessive and reaching levels that were not supported by the return on capital employed. So I think it’s a welcome correction. Obviously, this will impact flows into Asian emerging markets and global emerging markets, but I’m hoping this tides over before Christmas or maybe even a little sooner, because typically the US markets soften towards the end of the year.”
On its impact on Indian market, Arora said, “I think the impact will mostly be from a flows perspective, not much otherwise. The US Fed and India have been moving in tandem as far as rates are concerned, give or take. Our inflation heading practically towards zero is a positive for us, but again, it’s largely about flows,” adding, “The bigger point here is that I’ve been hearing a lot of commentary from economists about how tariffs are lower in some of our neighboring regions, and why ours are at 50 per cent. From a US-India standpoint, a major trigger could be if that 50 per cent comes down to 35, 30 or even 25. That could be a significant boost. But otherwise, we are primarily looking at this from a flows perspective.”
Consumer stocks
Talking about consumer stocks, he said “I wouldn’t touch consumer stocks right now unless they are in the discretionary segment. If you look at volume growth in consumer companies, it has been a disaster. Lever was at 0 per cent, Emami was around -16 per cent, and even in QSRs, if you look at Westlife’s numbers, it was about -3 per cent same-store sales growth. Even Jubilant, despite the market getting excited about the 7-8 per cent like-for-like growth, people forget it comes on a 1 per cent base.”
“If you look at paints, the sector is seeing a revival. P&G and Gillette, although not widely tracked — we were among the few brokers that covered them — are virtually monopolistic businesses trading at around 42-43 times earnings. Gillette has no real number two competitor. Even in P&G’s Whisper, market share remains strong despite attempts by private labels and some Japanese brands, which have not succeeded. These are businesses delivering over 100 per cent RoCE that you’re getting at 42-43 times,” Arora said.
FMCG and QSR Earnings
Talking about his preferred ones, Arora said, “In consumer staples, the only names I would probably look at are ITC and Marico. On the discretionary side, I prefer Asian Paints. Extending that to alcohol, as we enter the summer season, this is not a bad time to accumulate United Breweries (UB) or United Spirits (UNSP). I would also say that one could consider trading out of some of the hotel stocks because valuations there are not very cheap.”
“Overall, I am more positive on consumer discretionary than on consumer staples,” he added.
Profit pools in the Banking Sector
Keeping his views on profit pools in the banking sector, Arora said, “I think that (banking sector) is absolutely where I would still be buying. Now, you may say valuations are not cheap because ICICI, Axis and Kotak are all trading at around 2.4 to 2.7 times one-year forward price-to-book. While that may look expensive compared to the rest of the pack, it is nowhere close to the historical highs these banks have traded at. In their previous bull cycle, they all traded between 3.5 and 4 times at their peaks.”
“You asked where the profit pool will come from. I think net interest margins for the banking sector are at the end of their decline. We have already started seeing sequential improvement in NIMs, not just in private-sector banks but even in the largest one, SBI, which reported a phenomenal sequential improvement. Asset quality is improving too. We are done with that last leg of stress—whether infra, steel, NPLs or telecom. All of that is behind us,” Arora said adding, ” If you look at the latest sectoral deployment of credit, credit growth has moved into double digits — around 11-11.5 per cent, up from the earlier 9-10 per cent range. So if NIMs have bottomed out and will expand sequentially and if asset-quality issues are largely in the past, most banks today are well-capitalised. Many banks — excluding the three or four major private-sector names mentioned earlier — are trading at ROAs of 1.3-1.6 per cent and ROEs of 13-16 per cent. For that, you’re getting the banking sector at 1 to 1.5 times price-to-book. For me, it’s a no-brainer to be buying banks.”
Moreover, he recommended “You could extend this to NBFCs as well, including gold-finance companies. Auto finance is doing well too. I would still be a buyer on dips in names like Chola, which looks interesting, and Muthoot, which also looks attractive.”
“If I were to recommend a basket, I would include SBI in the public-sector space, HDFC Bank — which looks fine even at current valuations — and AVAS. On the insurance side, ICICI Prudential Life looks like an interesting bet. Asset-management companies also appear attractive; these are steady 30–35 per cent RoE/RoCE businesses, and mutual-fund inflows have been strong.”
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money-related decisions.)