Rajat Sharma on Defence and Real Estate: Are High Valuations Sustainable?
Rajat Sharma of Sana Securities advises caution on defence and real estate stocks due to their high valuations, despite positive market sentiment. He also highlights the resilience of ITC and alcohol stocks in the FMCG sector.
Defence StocksReal EstateItcFmcgSana SecuritiesReal EstateMay 30, 2025
When it comes to defence stocks, Sharma acknowledges their strategic importance for India, especially in light of increasing global hostilities. Companies like Bharat Electronics, which have produced critical equipment like radars, are indeed significant. However, he points out that these stocks are trading at very high valuations. While sentiment may keep these valuations elevated for a while, Sharma believes that they are not value buys at current prices. He suggests that investors might find better entry points in the future.
The real estate sector, on the other hand, has also seen a significant surge in prices, particularly in regions like Delhi, NCR, Bangalore, and Hyderabad. Companies like DLF, Prestige Realty, and the Lodha Group have benefited from this trend. Despite the robust house prices and strong sales, Sharma notes that these gains are not being reflected in the balance sheets of these companies. This discrepancy raises concerns about the sustainability of their high valuations. Real estate is a cyclical business, and while sentiment may keep these stocks afloat for a couple of quarters, the fundamentals do not support such high valuations in the long term.
In the FMCG sector, Sharma sees a different dynamic. While consumer discretionary stocks like Voltas have their challenges, he focuses on the impact of quick commerce on traditional FMCG companies. Quick commerce platforms have disrupted the market, particularly in urban areas, where consumers are increasingly buying smaller, everyday items online. This has led to margin pressure for companies like HUL, Britannia, and Nestle. Sharma believes that these companies will eventually figure out how to navigate this new landscape, but it may take some time.
In the meantime, Sharma recommends focusing on FMCG stocks that are less impacted by quick commerce, specifically cigarettes and alcohol. These products are not sold online due to government regulations, making them relatively insulated from the quick commerce trend. ITC, in particular, is highlighted as an attractive investment due to its strong market position and decent valuations. The recent correction in ITC's stock price following the BAT stake sale has made it even more appealing.
Sharma also warns investors about the risks in other overheated sectors. He points out that PSU stocks, despite recent corrections, are still expensive compared to their historical valuations. Similarly, while power generation stocks like SJVN and NHPC have seen significant price movements, they are still not cheap enough to justify investment. The overall theme, according to Sharma, is that investors should be cautious about sectors with stretched valuations and should look for opportunities in more resilient and undervalued stocks.
In summary, while defence and real estate have been the flavour of the market, investors should exercise caution due to high valuations. FMCG stocks, particularly those in the cigarette and alcohol segments, offer a more sustainable investment opportunity in the current market environment.
Frequently Asked Questions
Why are defence stocks considered overvalued?
Defence stocks are considered overvalued because they are trading at very high valuations despite their strategic importance. While sentiment may keep these valuations high for a while, they may not be sustainable in the long term.
What are the concerns with real estate stocks?
The main concern with real estate stocks is that while house prices and sales are robust, these gains are not being reflected in the balance sheets of real estate companies. This discrepancy raises questions about the sustainability of their high valuations.
How is quick commerce affecting FMCG companies?
Quick commerce platforms are disrupting the FMCG market, particularly in urban areas. This has led to margin pressure for traditional FMCG companies as consumers increasingly buy smaller, everyday items online.
Which FMCG stocks does Rajat Sharma recommend?
Rajat Sharma recommends investing in FMCG stocks that are less impacted by quick commerce, specifically cigarettes and alcohol. ITC is highlighted as an attractive investment due to its strong market position and decent valuations.
What other sectors should investors be cautious about?
Investors should be cautious about PSU stocks and power generation stocks, as they are still considered expensive compared to their historical valuations. These sectors may not offer the best value for investment at present.
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