Best FMCG & Auto Stocks To Buy

Antique Stock Broking has carried out a comprehensive research of all the top FMCG & Auto stocks and identified their respective strength and weakness. Based on this research, Antique has identified the best FMCG & Auto stocks that are investment worthy at the present time 

FMCG Stocks Valuation and Recommendation

We remain positive on the overall Indian FMCG space in the longer term due to the rising awareness for branded products. However in the short term, the space provides limited scope upside potential. We therefore have neutral rating on the sector.

Our top pick in the sector is ITC which provides a scope for re-rating from the current levels, in view of its dominance and resilience in the cigarettes division. We believe that the company is well placed to grow its cigarette EBIT by 21% during the next two years. We therefore recommend a BUY on the stock at the current levels.

We remain positive on Nestle in the medium to long term due its strong presence in low penetration categories like nutrition, instant foods and chocolates and confectionaries. However in the short term, the stock lacks triggers as the recovery in its business would be gradually spread over 12 month period. We therefore maintain our HOLD rating on the stock at the current levels.

In the liquor space, we believe that Radico Khaitan is a strong re-rating candidate with price hikes being implemented across states and the premiumisation initiative of the company. The company also witnessed an improvement in its cash flows during FY12. We recommend a BUY on the stock with a target price of INR158

FMCG Stocks: Summary of Recommendations
Company	Mcap		Reco	CMP	Target	Return (%)		FY14e
	(INRbn)						EPS (INR)	P/E (x)	ROCE (%)
ITC	2,337		BUY	297	322	9	11.8	25.2	49.9
HUL	1,241		HOLD	574	524	(9)	17.5	32.9	65.5
Nestle	458		HOLD	4,766	4,495	(6)	149.8	31.8	39.1
Colgate	168		HOLD	1,236	1,213	(2)	48.5	25.5	125.9
Godrej	230		HOLD	674	625	(7)	28.4	23.7	25.6
Dabur	235		HOLD	135	129	(4)	5.4	25.2	29.8
Marico	131		HOLD	203	198	(2)	8.6	23.5	20.5
Asian Paints	373		HOLD	3,885	3,799	(2)	152.0	25.6	50.0
Radico	16		BUY	117	158	35	10.7	10.9	34.0

Auto Stocks Valuation and Recommendation

While current volumes/margins might not provide too much to cheer about, we believe that we are nearing the fag-end of the pain. Going into an easing rate cycle, we expect the auto companies with a higher sensitivity to an improving macro (cars/CVs) to witness a gradual uptick in volumes and consequently margins. This makes them strong re-rating candidates as well. Analysing the past few cycles, we can infer that even an indication of rates easing-off, re-rates multiples for the rate-sensitives, much before an actual uptick in volumes (which could be even 2-3 quarters away). This also makes us believe that directionally, defensives (2Ws) would underperform from here on.

Among the large caps, our pecking order remains Maruti Suzuki (multiple cycles turning its favour), Tata Motors (JLR’s product cycle in a sweet spot) and M&M (impeccable auto business; tractor downgrades behind us). Outside the front-liners, we like Eicher Motors, as we foresee a positive delta in volumes & margins for the cash cow, i.e. Royal Enfield. Furthermore, while playing a cyclical uptick in CVs, we prefer Eicher (VECV) to Ashok Leyland, given the cleaner business structure and superior return ratios.

For two-wheelers, while we maintain our positive bias for the superior business model (which is a boon in any environment), we believe that good businesses seem to get their due credit only in tough times. Between the two-wheeler biggies, while we prefer Bajaj Auto to Hero, staying true to our underlying theme, we would avoid the 2W pack for now. We downgrade Bajaj Auto to HOLD post the recent run-up in the stock and maintain our HOLD recommendation on Hero.

Among the ancillaries, we like Bosch as a structural play, but foresee a better entry point in the near-term. For Exide, while operating metrics are finally improving, our bull-case target price provides less upside. With risk-reward unfavourable at this level, we recommend a HOLD.

Auto Stocks: Summary of Recommendations
Company	Mcap	Reco	CMP	Target	Return (%)		FY14e
	(INRbn)					EPS (INR)	P/E (x)	ROCE (%)
Maruti Suzuki	394	BUY	1,365	1,712	25	99.1	13.8	22.0
Tata Motors	835	BUY	262	324	24	47.0	5.6	31.3
Mahindra & Mahindra	540	BUY	825	925	12	63.2	10.3*	30.1
Bajaj Auto	507	HOLD	1,752	1,856	6	133.6	13.1	60.5
Hero MotoCorp	359	HOLD	1,800	1,935	7	115.3	15.6	47.9
Eicher Motors	60	BUY	2,220	2,575	16	190.4	11.7	37.6
Bosch	276	HOLD	8,790	9,502	8	475.1	18.5	30.3
Ashok Leyland	64	HOLD	24	26	7	2.3	10.3	13.4
Exide Industries	126	HOLD	148	146	(1)	9.1	15.2*	26.8
Escorts	7	HOLD	68	66	(3)	13.2	5.1	6.8