ITC | Emami: Why Daljeet Singh Kohli prefers Emami to ITC

What did you make of ’s quarterly show?
We do not cover ITC and we do not have ITC in any of our portfolios precisely for this reason that for the last many quarters they have not been performing as was expected by the markets. Their dependence on the cigarette business continues. There have been many talks about the non-cigarette FMCG business taking over or getting preference over the cigarette business, but all said and done, in the last many years they have not been able to do that.

In the case of the FMCG business also, many other small companies like Dabur or Marico are growing much faster. So despite having a reach, despite having a wide portfolio of products they have not yet been able to justify their capabilities and that is the reason why the stock has not been performing for many years. All the rumours about some demerger, some value unlocking have turned out to be just that, rumours. There is no point reacting to that and no point expecting that also and therefore for us this was a non-event.

We will wait for the company to change its ways of thinking and show that in terms of numbers, management commentary, etc. As of now, it seems that they are happy with what they are doing and with this 4-5% growth on cigarettes — 5-7% volume growth, 5-7% pricing growth. I think the stock will also languish along these lines. A similar kind of activity was seen in Britannia for many years because the management was not doing things which the market wanted and it languished for many years. When there was a change at the top level, we thought that the right moment had come for ITC but we have had no indication so far id anything is happening or not.

So for us, there are better opportunities in FMCG. A disclosure, we have one FMCG stock in our portfolio — Emami – -and the thesis behind that is that they went through a very bad patch for the last two-three years but the management has come out very strongly. They have taken the needed remedial steps and they have maintained gaining market share plus play on rural and urban, Emami is well placed in terms of valuation also, in terms of managements behaviour in an adverse situation and that is more important for us because once things turn normal, this company will perform much better. So, that is the stock that we have in our portfolio.

Muthoot stands out because it is in a niche segment — gold loans and that was one category of loans that was immensely popular given the fact that gold prices had risen and the cash crunch that a lot of individuals were facing. What is your take on that? Also, do you see asset quality stress in NBFCs more than in some of the banks?
We have a positive view on Muthoot Finance although it is not a part of our portfolio as of now. Amongst the financial companies we only have large private sector banks and Bajaj Finance and Bajaj Finserv as part of our portfolios. The view is positive on Muthoot Finance.They are in a niche segment and their asset quality has always been good. But taking a cue from what Mannapuram has done this quarter and the kind of auctions they had to do for the smaller borrowers because they were not able to repay, is not a good sign. That shows that there is a stress in the lower strata and that is likely to increase because of this Covid situation. Only Muthoot is catering to a slightly higher segment and that is why they have not seen that kind of reaction this time. But if the system is going through this, then obviously there will be a problem for all these companies.

The rural-based or rural-focussed NBFCs like Mahindra & Mahindra etc are continuously under stress for so many months, so many quarters and they are likely to remain like that because this time we have Covid impact even in the rural areas. So in the NBFC space, Bajaj Finance is the only one which stands out because it is far more granular, it has a lot more fee-based activity, it has a lot of technology advancement there and it has the capability by virtue of big size to handle stress in a much better manner. Therefore Bajaj Finance is the preferred pick there.

Within financial services, insurance will be a sector one can look at. We will go for general insurance. The same way, in life insurance, the penetration levels are very low. So, these two; HDFC Life and ICICI General Insurance are part of some of our portfolios.