 "Will HUL open offer gains trigger a mid-cap FMCG rally?")
“The (HUL investors') money belongs to equities and ideally it should return to the market in some manner or the other,” says A Balasubramanian, CEO of Birla Sun Life Asset Management Company.
According to experts, investment in mid-caps is no-brainer, given their recent performance and the valuation gap between HUL and others in the sector. “Many second-tier stocks are trading at a huge discount to what Unilever paid for in the HUL open offer. This provides a great opportunity for ex-HUL investors to re-jig their portfolio in the favour of top performing mid-cap stocks in the sector,” says Devang Mehta, senior vice-president and head (equities sales) at Anand Rathi Securities. His top picks are Bajaj Corp, Colgate-Palmolive and Pidilite Industries.
Historically, Hindustan Unilever and ITC have been the preferred pick in the FMCG space, given their large market capitalisation and inclusion in benchmark indices such as the Sensex and Nifty. This is especially true for large institutional investors, which have to be mindful of the impact cost of their investment and low risk quotient. Investment in these two companies was a no-nonsense way to get a slice of the India consumption story. The open offer has greatly reduced the options for investors now.
After the open offer, the free float in HUL is down to 32.7 per cent from 47.3 per cent earlier reducing the stock’s ability to, absorb fresh inflows. “This might force many investors and fund managers to re-adjust their portfolio and look for alternatives if they wish to the maintain their exposure to FMCG sector at the earlier level,” says Swati Kulkarni, vice-president and fund manager (equity) at UTI Mutual Fund.
This is likely to benefit leading mid-cap and non-index FMCG stocks, especially those with upside potential. “Money will flows to those midcaps, which can match the risk-return profile and upside potential provided by the HUL,” Kulkarni adds. ITC could also gain, as it is the most valuable stock in the sector, with the highest free float among all index stocks.
Index funds will also have to rejig their portfolio, as the open offer has cut the HUL weightage in the Sensex and Nifty and increased the weightages of other stocks. Index funds would now have to re-adjust their portfolio accordingly.
There is also a possibility of investors cutting their equity exposure or moving their money to large cap stocks in other defensive sectors such as pharma and information technology . “Mid-caps are always riskier than large-cap and index stocks and it might not suit many HUL investors, especially if they been holding it for a long-time. They would prefer a similar company in other sectors or else would park their money in other assets such as fixed deposits,” says Apurva Shah, head (investment research) at BNP Paribas Asset Management Company.