Can one look to buy a fresh or add more positions to Reliance at current levels?
Along with slightly disappointing numbers coming from retail and Reliance Jio, we are seeing fabulous performance from the O2C segment. That is the thing about Reliance or for that matter any other diversified company that if one or two divisions are not performing up to par, then the others tend to step up and this is what has happened in Reliance. From these levels, the stock price can be an outperformer if not at least the market performer.
This particular commodity rally is going to last for a few more quarters and Reliance is making the maximum out of it. Keep in mind that most of their expansion plans are already on stream and so they are well poised for the up cycle in commodity prices and whatever cash flows are going to come through will be aggressively used to reduce debt and therefore improve the risk profile of the company. From time to time, we keep hearing positive news flow in terms of deals or strategic divestments or getting strategic investments and spending that in the oil to chemical (O2C) business. If that comes through, then again it will improve the sentiment and for a couple of quarters or so, we may see Reliance firing on all cylinders.
There are two triggers which I am looking out for in over the next couple of quarters or so. One is the strategic investment in the O2C business — converting it into a subsidiary and secondly a tariff hike by Reliance Jio. Clearly there is only so much that the company can do in terms of adding new subscribers and once normalcy returns and the overall economic sentiment is better, they should go in for a material increase in Reliance Jio tariff. That would enable it to improve return on investment and get profitability going for that division in a significantly higher manner and that will benefit the entire industry.
So these are the two triggers in Reliance Industries but there is no denying the fact that it is a portfolio stock and depending upon allocation to that particular company, investors should look for ways and means to increase their exposure, maybe not at these levels, but on corrections.
Why is Bajaj Finance holding up so beautifully well?
They are going more and more towards using digital products and digitising their operations and improving the touch points as far as the retail lending is concerned. It is a very well managed company. On the whole, I think investors realise that if you are there with the strong banks, NBFCs and you hold these stocks for a longer period of time like five years or 10 years, then you are better off than buying the tier-2, tier-3 banks or NBFCs which have a good run for maybe two to three years or so but then again get into a muddle as far as NPAs are concerned.
Bajaj Finance with its pedigree and the ability to raise money and therefore having high capital adequacy is a more attractive bet. Also, it is a purely retail business and does not have some of the risk associated with corporate lending. Also, they have stayed away from risky lending to developers and some of the other products.
Keeping all of that mind, the premium multiples are justified and the stock can easily be a market performer and an underperformer. Having said that, a disclosure, we and our clients are invested in Bajaj Finance and it is a stock you can hold as part of your core holdings and remain invested for a long period of time and expect that secular growth in earnings will result in very decent return on investment.
