Does disadvantage Vodafone equals advantage Bharti or do you think the market is coming in from a sentimental place as of now?
Right now, at least, that appears to be the equation as more and more it seems like Vodafone is getting deeper into trouble and unless some corrective action is taken in terms of fresh fund infusion, in all likelihood it may fold up or even if it does not, it will be a completely weakened player and lot of its subscribers will go to Bharti as well as Jio. Investors are sensing that opportunity for Bharti.
Apart from that, what has gone down very well with Bharti’s shareholders is the fact that the company has boldly increased its tariffs. First, it did it for the post paid and then for prepaid as well. In all likelihood, from the second quarter FY22, we could see gradual increase in ARPUs and that will certainly help the profit margins of the company given operating leverages are gradually getting created in the African subsidiaries and some of the other digital initiatives that the company has undertaken. Also the stock has been a big underperformer.
Keeping all of this in mind, we are seeing a good momentum building up behind and the balance sheet is in great shape and not impacted much by the setback of the Supreme Court AGR review. Keeping all of this in mind, it seems to be a good pick at this point of time and maybe the stock can rally even higher from these levels depending on news flow.
The FMCG sector has very nicely managed to try and absorb the raw material cost pressures, bring about calibrated price hikes and managed to post extremely strong volume growth. was the most impressive of the lot. How will you approach FMCG now?
We are broadly positive towards FMCG stocks and as and when normalcy resumes, we will see volumes move up even higher. There were some setbacks as far as rural markets were concerned but those are getting sorted out, based on the demographics of the country and the entire premiumisation trend which was taking place.
Godrej Consumer, maybe even Britannia numbers were pretty decent given the challenging environment and the base effect which the companies have to deal with. There are good pockets of opportunities within the FMCG space and Indian FMCG companies, which are focused on health hygiene, should do very well because habits have changed post pandemic and they will be more focussed on health and hygiene and companies which cater to those segments will certainly see a good growth trajectory going forward. So yes we are positive.
Also over the last several quarters, FMCG has broadly been underperforming and now earnings are coming through, We are seeing a compression of the price to earnings multiples as well and as raw material price increases are being dealt with gradually in terms of better cost rationalisation as well as selective price increases, that process will go on one more quarter as well. So whatever pressures were there on margin over the last quarter should get gradually neutralised over the next couple of quarters. These companies should be in the clear because commodity price increases have already taken place and those prices are now flattening. So, very positive on FMCG but go for the Indian FMCG companies. The valuations are attractive, their growth rates are higher than MNC FMCG companies and there is good scope for earnings to move up.
There was a big move about two months back in the entire PSU pack but they are completely off news now. Are you still staying away from PSUs?
We are quite positive on PSU banks and I know that I have not been greatly in favour of them over the past several years because their NPAs have been shooting up but now they are entering a new growth phase as far as PSU banks are concerned. Largely, the legacy NPAs have been dealt with and pre-provisioning profits are strong to cover any incremental NPAs on account of Covid which may appear to be transient also if all goes well.
The biggest attraction of PSU banks has to be the PE multiples. They are trading at extremely attractive PE multiples as well as dividend yields based on what dividends they have given historically. A lot of rationalisation in terms of amalgamation of banks has taken place. PSU banks are in a very sweet spot. It is almost like a blue sky scenario for them where credit cost will significantly go down over the next couple of years. There could be windfall gains in some of the NPAs which they have provided for and start to perform or they are able to do so on recovery through the IBC process.
Maybe the next 6 to 12 months could be very good for PSUs but one needs to be only careful and it’s not just NPA numbers. Things will start getting ugly two-three year down the line, given that nothing really has changed in terms of management or human resource policies or risk. The problems will recur but for the time being, these banks should do very well. SBI has done well. So maybe if you have more appetite for risk or the likes of Canara Bank, Bank of India, PNB are still available at a huge discount to SBI, at or most instances below their book value. There is good scope for smaller PSU banks to move up as they play catch up with SBI.
