Trent and Aditya Birla Fashion stocks are going higher, Trent is one of the most expensive stocks with a PE multiple higher than even Asian Paints. Their business is going to suffer because of lockdown and yet the stock is marching to a new high?
If you look at all the retail companies you have mentioned, Aditya Birla Fashions. Recently they acquired Sabyasachi which is a luxury retail designer brand and that does not fit with Aditya Birla’s overall business strategy because Sabyasachi is a very high-end boutique with a niche clientele. They have also looked at a couple of similar acquisitions. After the lockdown, real luxury items have actually done well. It is only the middle and the lower mid kind of products which have suffered where people are downtrading.
Trent on the other hand is one of those scarcity premium stories. It is very focussed on the middle class end of the market. There has been some downtrading, sales have been down because malls in big cities have been shut. There is an expectation that if there is no third wave by the festive season this year, it can actually be a blockbuster year for retailers. If this theory holds good, then Trent will be the first to benefit.
Are you subscribing to Zomato?
Yes indeed. It is one of the first truly internet companies in India. It is a very well discussed story in terms of two-three things which will pan out. It is a stock to subscribe for because the number of people who shop online and then do food shopping online is a very small percentage of the total population. One can expect a three to four times increase in the number of users over the next three or four five years. Now if that happens, then there is going to be operating leverage. Currently the margins are negative (minus 20% odd). With an operating leverage, the EBITDA margin will move to plus 22%-25% range.
On the other hand if there is competition which is bound to come, the margins will turn down. The worldwide margins have turned down but then they will move into the adjacencies. Why should they deliver only food? Why can’t they deliver pharmaceuticals? So, there are enough growth areas. It will largely be execution, execution and execution for Zomato over the next two-three years.
Which is your favourite reopen trade?
Mahindra Holidays look good, Chalet Hotels look good. Chalet Hotels is the operator of Marriott Hotels in India and they have a good chunk of the hotels in Mumbai and other big cities. There have been no banqueting, no restaurants; occupancies have been very low and all those things will hopefully reverse slowly as the unlock happens, provided there is no third wave.
Mahindra Holidays has a user subscriber base who have been paying their subscriptions for the last couple of years and going nowhere because of the lockdowns. All those people who have not used it, will want to use it. As Trent has shown, every time there is a lockdown in any city, the local holiday spots and hotels have seen very strong occupancies. If this trend continues, Mahindra Holidays, Chalet Hotels will look very good.
What would you bet on as a category for the reopen trade among aviation, multiplex, hospitality and hotel stocks?
I just spoke about hotel stocks. Chalet looks good, Mahindra Holidays looks good. Chalet Hotels’ balance sheet is stronger than Indian Hotels but the latter has a wider range of properties. So both of them are fine and the revenue streams will come back fairly strongly.
Second is commercial vehicles as well as tyre stocks. Ashok Leyland is one of the largest bus and truck manufacturers in the world. They make buses and trucks across categories — right from one ton to 55 tons — and CV cycle was not actually doing well even pre pandemic. During the pandemic, most of it went down. Therefore as the economy reopens, Ashok Leyland along with Tata Motors looks good.
Among the tyre companies — both JK Tyres and Apollo Tyres — will benefit from domestic unlock as well as the export businesses which are doing really well. The valuations for JK Tyres and Apollo Tyres are still very attractive and they are still way off their peak multiples. Quite some upsides are left in these stocks.
Where would you place a bet among Sagar Cement, Birla Cement, JK Lakshmi and Star Cement? What is the outlook within midcap cement?
It depends on where the capacity utilisations are still fairly low given last year’s and this year’s lockdowns. As the lockdowns improve and economic activity picks up, the capacity utilisation rises providing them a good operating leverage. Irrespective of the noise on pricing from the government side,
as well as JK Lakshmi are very attractively priced.
If you look at EV/ton, they trade at a significant discount to UltraTech and ACC. While they trade at about $80-90, even if they go up by another $20, they will still be trading at a big discount to an UltraTech. So JK Lakshmi, Sagar Cement and even Birla Corp look very good.
