Sunday, November 20, 2022

Welcome to The Weekly, where our team shares a few thoughts to take you into the week. This week’s thoughts have been brought to you by Sagar Lele, Founder of Rupeeting. He manages the All-Weather Portfolios at Rupeeting.

A Risky Affair

The Nifty reached its all-time high last week. We see three potential risks for the Nifty to sustain at current levels.

1. Valuation premium
   • The valuation premium for India has been at an all-time high, and that stands as a risk. But it may not be a factor to sell on. After all, India is also the fastest growing economy, and that would prompt global funds to be massively overweight India.
   • As long as the growth premium continues, the valuation premium can be justified. However, if growth falters (and it can given increasing macro headwinds), there is no reason for valuations to stick around at the peak.
2. Currency and flows
   • The rise in the US dollar has been a major concern. While India has been one of the less-depreciated currencies, aggressive rate hikes in the US do pose a threat on the Indian Rupee. Liquidity flowing out of emerging markets, and into the US remains a strong possibility in global asset allocation.
   • Moreover, for any foreign investor the required rate of return in US dollars, increases when the rupee depreciates. If an investor made 10% in India, and then had to take it back to the US, they would take nothing if the Indian Rupee depreciates by 10%. If currency has the potential of eating into returns, it also has the potential to stop flows into India.
3. The rising yield gap
   • At the moment, for Nifty 50, the earnings yield is at 4.5%. However, bond yields are currently at 7.3%. The spread of 280 bps between the two seems like a stretch.
   • We see a case for the yield to remain or go down from here. However, in a rising rate environment, bond yields can only go higher. The only way the gap then can come off is by the markets falling.

<aside> 💡 Our View: Valuation indicators have been increasingly raising risks. In a rising rate environment, and a slowing global economy, we’d not be rooting for the upswing to continue sustainably. We’d be buyers when the markets fall instead.

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Idea - Dabur

Dabur has been one of the worst-performing stocks in the FMCG pack. Over the last year, it has gone down by 10%, whereas the Nifty FMCG index is up 13%.

Why has Dabur suffered?

1. In 2QFY23, while revenue for Dabur increased by a mere 7% YoY, its operating profit fell by 2% YoY. Although a household name, Dabur’s product portfolio doesn’t necessarily scream “staples”.

2. It has seen a massive slowdown across

   • Health Supplements - Chyawanprash and Dabur Honey,
   • Digestives - Hajmola and Pudin Hara,
   • OTC Products - Honitus, and
   • Skincare - Fem, Gulabari

   Home Care (Odomos and Odonil) and Food & Beverages (Real) have done extremely well, but then, they form less than a third of Dabur’s revenue, and don't really move the needle on overall performance.

3. Dabur's rural presence is extensive, extending to 1 lakh villages, and 45% of the company's revenue comes from these areas. Since the beginning of 2022, rural India's inflation has been higher than that of India's cities. In 2QFY23, demand increased by a mere 1% in rural areas against 6% in urban areas.

What next?

The underperformance may make Dabur a good pick at current valuations. There could be a case for an upside given some easing in inflation, good monsoons and the upcoming general election, which all bode well for rural demand.

<aside> 💡 Our view: Overall, the resilience in consumer spending has been a surprise. With some signs of easing of inflation, and Dabur’s cost optimisation / pricing measures, Dabur could be a good stock to accumulate. The valuation discount to the rest of the pack provides some additional comfort.

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