Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Rachel Winter. She's Investment Director at Killik & Co. Hello.
Rachel Winter: Hi, Holly.
Black: So, you're here for your monthly rundown of three stock picks for us. Where would you like to start?
Winter: I'm going to start with a company called Reliance Industries, which is quite an interesting one. It's an Indian company. It's actually the biggest private sector company in India. It's worth over $160 billion, but it's listed on the London Stock Exchange and it also trades in dollars. It's quite a complicated company. It's a conglomerate. It's got roots in oil and gas, so it's very big in the oil and gas sector. It's also the biggest mobile services telecoms provider in India. But the reason we like it is the retail exposure. So, it's a big retailer. But at the moment it's moving into online retail and that's something that hasn't really taken off in India yet. So, we think there's a huge growth opportunity there. And Reliance has a platform called Jio platforms and that is helping a lot of smaller online operators or smaller non-online operators rather to start operating online. And Facebook has just taken quite a big stake in that particular business. So, we think the growth opportunity there is really quite exciting.
Black: Now, India is quite out of favour at the moment, particularly after the Covid-19 pandemic, because it was hit quite hard. So, how does that affect a company that does its business there, but is listed on the London Stock Exchange?
Winter: Well, all of Reliance's business is done in India. So, it really is very heavily impacted by the Indian economy. And I know it has been affected quite badly by the coronavirus. But we've really got to look at the longer-term opportunity. India has an incredibly young population. The growth potential is huge, and we do think that over the next decade there will be a huge move towards online retail in India. So, we've really got to look at that and that's why we think this opportunity with Reliance is so exciting.
Black: Okay. On to stock number two.
Winter: Stock two is Electronic Arts, which is one of the biggest gaming companies in the world. Now, gaming has really been one of the main beneficiaries of lockdown. People have been gaming a lot more because they're just looking for something to do. But we also think that gaming will be a more permanent beneficiary of lockdown, the reason being that a lot of people that weren't gaming before have not been introduced to gaming through lockdown and a lot of those people will probably never look back and they will become permanent gamers. And Electronic Arts owns some of the most popular games, for example, with the FIFA franchise. It also owns The Sims and Apex Legends. So, it's got a really, really strong catalog and we think it will do well going forwards. And something else that has happened during lockdown – whereas a lot of people used to go out and purchase physical copies of games, they're now ordering or downloading a lot more games online and the online games actually have a much higher profit margin for the companies making them. So, the lockdown has really encouraged to switch away from physical games towards online versions of games, and that's been a great move for the online gaming companies.
Black: Is there a sort of a subscription element here that that keeps revenues quite sticky?
Winter: Absolutely. Yes, and we're moving more towards that. So, previously, you would have had to buy a gaming console and that would have been quite a big upfront cost, and that probably did put quite a few people off becoming serious gamers. But now we're moving more towards the kind of cloud streaming or subscription service and that is opening up the gaming market to a lot more people.
Black: Okay. What's our final stock?
Winter: Final stock is Diageo, one of the biggest drinks companies in the world. It has a particularly large focus on spirits. So, it owns Gordon's gin, Smirnoff vodka, Johnnie Walker whiskey. So, it's got a huge portfolio of very valuable brands. For us, this is really a core holding in a lot of portfolios and we foresee quite a large increase in the drinking of particularly spirits over the next few decades.
Clearly, the coronavirus has been a very negative for a lot of these drinks companies because a lot of their sales comes from pubs and restaurants. So, the closure of those has been very bad news, but that is reflected in the share price. So, for Diageo, the share price was over £35 a year ago, and now the share price is below £25. So, there really has been quite a large fall in the share price. And we think this is perhaps quite a good opportunity to tuck away a long-term hold into your portfolio when you can buy it at a more attractive price than you could last year.
Black: And what about this trend towards low or no alcohol beverages that seems to be picking up? Is Diageo trying to tap into that?
Winter: Absolutely. So, they do offer a number of non-alcohol versions, particularly in the beers market and you could say that there was in fact a higher margin on non or low alcoholic beverages because you haven't got the tax and yet you're charging a pretty similar price for the non-alcoholic version as you are for the alcoholic version. So, a lot more of the price actually goes into the profit margin of the company. So, there is quite a big growth in that market. But it's not something we're seeing so much of in Asia, and that's where a lot of the demand for premium spirits is coming from. So, while the low alcoholic beverage market is doing well in some parts of the world, I still think there is a lot of growth potential for alcoholic beverages as well.
Black: Rachel, thank you so much for your time. For Morningstar, I'm Holly Black.
