Rajat Sharma on why he will avoid financials & L&T, buy FMCG stocks now

Inflation is at record high. We are looking at an eight-year high inflation. There was a surprise rate hike last week. There is all likelihood that there is going to be another rate hike on the 6th and now the question is not really whether the rate hike is in line with what the market is expecting, which is 0.75%.

Even if it is not in line with that, I doubt if the market is going to cherish that. It may go up 100-200 points but the writing is on the wall that interest rates are likely to go up and that is going to play out the balance of this year.

The fear really is not of margin pressures. The fear really is that a lot of companies which have provisioned for or reduced provisions in the last two years could see a lot of their debt going bad if interest rates go up so aggressively as they are likely to. I do not see why anybody in their right mind would look to add banking and financial services stocks at this point.


What is your thought on L&T?Going forward, they are going to focus EPC, manufacturing and services and they are likely to see strong growth. Even in IT and technical services, they are looking at a merged entity – LTI-Mindtree.

In the case of L&T, most of their contracts – whether it is EPC or infrastructure or otherwise – remains the government or the state governments. In an environment, where the government is likely to pull back the money as they have not met the disinvestment targets, I do not know where they are going to get the money to fund these big projects which L&T benefits from.

Yes, it is true L&T has a very strong pipeline but all of that is already factored into the price of the stock, especially at the point where are markets trading at these kind of valuations and L&T even now has the highest weightage in the CNX infra basket at around 40% plus. So it finds place in most infra focussed funds or most largecap funds for that matter. As withdrawals come, I do not think L&T would be any exception and would save the day for investors who hold L&T just as a single stock. I think the stock is in for some tough times going forward.

A lot of experts believe that one is safer standing with the largecaps right now and they have been cutting off and reducing exposure within the mid and the smallcap indices. Is that your strategy as well for the year ahead?
Partly yes, but then I am not looking at stocks as midcaps, large caps or smallcaps; I never do it actually. It is true that after this fall, I have looked at a few stocks, I have started adding a few stocks but I have not really gone with the view that I am going to only stick to largecaps.

I will give you an example. One of the sectors that I really like right now is FMCG, in addition to a few pharma stocks that I have added. I have not really looked at stocks from FMCG and thought I am going to buy only

, Hindustan Lever, and Godrej; I have looked at stocks across the entirety of different market capitalisation and the reason is really simple; as I said, with inflation numbers being really high and RBI likely to increase interest rates, the companies that would benefit probably would be the companies that do not have debt on their books and who have the pricing power to pass on any rate increase or raw material and stuff to the ultimate consumer.

Time and again, in previous market cycles, FMCG went for reduced volumes instead of raising prices. I am talking about typical ketchup, tea, coffee, biscuits– companies which sell household stuff. So yes, I am looking at this sector in particular and within this sector, I have started adding stocks across various market caps right now.