In an interview with Economic Times today, Sunil Bharti Mittal has clearly alluded to the fact that balance sheet challenges are behind them, pricing power seems to be coming back and the company is gearing up for 5G auction. Could Bharti be the next one now?
Bharti has done well over the last few months after they started gaining market share in the telecom market where they started adding more subscribers than Jio and their performance on the ARPUs also has been better. Strategically, the company is on the right path and most times they will tend to outperform the analyst expectations. The virtuous cycle seems to have started for Bharti. There are very few companies which stand as companies which could have some valuation comfort in the market today and Bharti is one of them.
The valuations of a large majority of large companies have gone way below fair value but I would think that Bharti is still at a space where if you look at how they have performed and relative to what they could do over the next two-three years, I believe they are still very helpless. They are still deleveraging opportunities and as that plays out, we will see a greater impact on profitability as that gets repriced at lower levels.
Last week saw a huge participation from some of the beaten down PSU stocks like NFL, fertiliser stocks. What is your view on the small fertiliser and small PSU stocks?
We tend to avoid these stocks typically. They rise at the end of the cycle and it is very tough to evaluate all of them. If people have made money in some larger companies or have not participated and feel that those companies can go up, then they want to take a bet. That phenomenon is picking up now. I do not think there is any great story in any of these sectors.
Given the cues that are coming out post earning season and particularly in some of the larger banks and IT names has been fairly encouraging. Would you agree?
The results have been pretty encouraging and have outperformed expectations, largely beaten by the margin improvements due to cost controls and low input prices and in some cases, a stronger revival in demand. The stronger revival in demand story is lesser, the margin expansion is greater due to either pricing power on the top line side for money of the commodity companies or strong parts in input cost or cost control on the rest of the companies.
The key is the sustainability of this because the commodity inflation is reaching unprecedented proportions. Oil prices are up 75%. A lot of the impact is yet to be passed onto the retail markets in India where petrol and diesel prices on an average get priced according to the last 15 days’ average. In last 15 days itself, crude oil prices are up 15%. The frenzy on asset price inflation is now reaching a significant proportion which will still impact margins going forward. I see a revival in economic activity and top line growth could improve going forward, but margins could be squeezed and that could slowdown the pace of overall market movement.
What is your view on , in the light of the recent run up in the stock price and with the new CEO who has an extensive background in the CV space?
Tata Motors obviously has had a run up with the expectation that the JLR sales will recover and there will be faster than expected recovery in the CV cycle especially in India. The key going forward will be 90% of the rally comes from JLR itself. The key is how that segment of the business does and how their electrical vehicle venture pans out because that is going to be the growth driver three to five years down the line.
I would think that a large part of the near-term positives are in the price, driven by significant outperformance in earnings in the last quarter. From here on, for the company to perform, they have to show one sustainable margin performance. Secondly, sustainable reduction in debt has been promised by the management and those are the things investors will need to watch going forward. In the near term, given the sharp runup, most near-term positives are already factored in.
Tata Motors CV cycle is picking up. Could Tata Motors be one of those stocks where in the near term 5-10% here or there could happen?
The way it is panning out, it seems they could do well over the long run but the domestic market can never be the focus for Tata Motors because most of the cash flow generation and the value in the company will come from their overseas operations. The domestic passenger vehicle business has suddenly picked up. It is doing well. But it is a miniscule part of the overall value in the company. If they focus here, it will be good for profitability.
The main story will be overseas JLR debt reduction and margin sustenance. It could do very well over the long run and the chairman of the group actually said last year that we are looking to make Tata Motors debt free over the next five years. At that time, I considered it a virtually impossible task. But if they do it, then the Tata Motors stock could go anywhere and I would still think that if they could achieve the debt-free status over the next three to five years, then Tata Motors stock could rise significantly from the current levels also.
Which are the pharma names that are looking attractive given earnings, commentary and outlook in some cases?
On the largecap side, I like
because strategically that company is turning around now. It is doing much better than what most people were expecting. They are cutting down their debt and on valuation, it trades at a significant discount to other largecap or midcap pharma names.
I believe that on pure valuation parameters and looking at what the earnings growth could be, Sun Pharma should do well. We bought it last month and after a very long period of time.
On the midcap side — though we cannot call it midcap any longer — Divi’s continues to surprise on the upside. They are continuously doing well and the growth is strong. Their outlook also is strong although near term, input cost pressure could put some impact on the margins. Longer term, that could do well but right now, the valuation looks a bit stretched.
