FMCG in a sweet spot after GST cuts and monsoon boost: Rajat Sharma
ADVERTISEMENT It was the Diwali bonanza and Prime Minister Narendra Modi's weekend speech that created a strong buzz in the markets. We can clearly see that the markets are cheering the GST bonanza announcement. In fact, even before the announcement came, the sentiment was already positive. Reports suggest that the GST cuts could potentially spark a consumption boost of around $13 billion. How realistic do you think this estimate is? And at the same time, are markets right in cheering consumption over capex, in your view?
Rajat Sharma: Absolutely, 100%. And the reason is not just about how much of this actually percolates. The bigger reason is that the slowdown in consumption had led to depleted price-to-earnings multiples for many companies. Even those that still looked expensive appeared so because earnings were not picking up. I am talking about frontline consumption stocks—whether FMCG or consumer durables—like HUL.
For disclosure, HUL and Asian Paints have been my top picks since the beginning of this year, and I have mentioned this on your channel before. The slowdown in consumption had been so severe that a recovery was inevitable at some point. First, we had income tax rates being revised upwards, leaving more money in people's hands to spend. Now, rate rationalisation will benefit the most diversified FMCG companies, such as HUL or ITC.
The third factor supporting this is good monsoons, which may lead to downward pressure on inflation. For companies like HUL, when raw material prices go up, they increase product prices and pass the cost on to consumers. But when raw material prices fall, they rarely revise prices downward—this results in additional profit margins.So right now, FMCG consumption stocks are in a very sweet spot. I am talking particularly about FMCG, not so much consumer durables. Of course, with air conditioners and cars, GST cuts will help, but the extent and timing of the impact remain to be seen. However, for lower-ticket FMCG goods, the impact will be visible in the next one or two quarters. That is why FMCG is a great place to invest right now—both because of the GST announcement and the way the sector has shaped up over the last year.
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Apart from the GST announcement, the Prime Minister also spoke about a host of other sectors—domestic affordable healthcare, pharma, indigenisation of defence equipment, and mineral exploration. He touched upon so many themes in that speech. Going forward, apart from GST, which sectors look more attractive to you based on government focus and policy push?
Rajat Sharma: It's interesting you ask that because we have been discussing this in our office. One sector that looks particularly attractive to me is pharma, and I'll explain why.
Unlock 500+ Stock Recos on App There has been no tariff news on pharma—no tariffs have been imposed on Indian pharmaceutical exports. While there has been talk of 25% or even 50% tariffs on many other sectors, pharma has been left untouched. The Prime Minister also spoke about indigenisation of pharmaceuticals and reducing dependence on imports.
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Companies like Dr Reddy's, Sun Pharma, Cipla, Glenmark, and Gland Pharma derive over 50% of their revenue from the US. Interestingly, despite no tariffs being imposed, pharma stocks corrected in the last one or two months. This dip, in my view, is a great buying opportunity.Pharma is also a significant bargaining chip for India in trade negotiations with the US. India supplies about 40% of generics used in the US and an even higher percentage of biosimilars. Without Indian pharma, the US healthcare system is not just vulnerable—it's completely exposed.
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So, I believe this correction is temporary, and this is the right time to buy into pharma. Stick to the top three or four companies: for generics, look at Lupin or Laurus Labs; for diversified players, Cipla, Dr Reddy's, and Sun Pharma are excellent picks.
While indigenisation will take time, our reliance on the US market is a bigger issue for us than it is for them. They simply cannot source these medicines at scale and cost from anywhere else. It's not discussed openly in the media, but behind the scenes, this is one of India's biggest negotiating levers. And that makes pharma a very interesting sector right now.
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