On IT stocks & Mindtree, Wipro outperformance
Some consolidation is healthy. Year to date, the IT index is up 44% and all these names, even the largecap names like Infosys are trading at 35-38 multiples and TCS probably at 40 earnings multiples. Even Mindtree is probably trading at a 40 plus earnings multiple. So IT services growing double digit with 20% kind of EBITDA margin and a 40 earnings multiple is slightly on the higher side.
Also, one factor to watch out for is attrition. There is a huge shortage of tech talent and companies which have a higher digital proportion of revenue with annuity type of contracts and their ability to repurpose talent and get the right mix, will play a very critical role.
In IT, one should not be confined to only domestic names. Apple has hit $2.5 trillion and is available at 28 earnings multiples. So is Alphabet and some of the other frontline names. One should have both domestic and an optional allocation in maybe Nasdaq ETF to play that.
We are in a good three, five year run as far as Indian IT is concerned. The cloud opportunity, the next generation technologies are here to stay. In the near term, some breather may happen because of valuations.
On ITC
ITC has been a focus of attention but it has not participated at all from the low levels. People are probably accumulating it more for dividend yield. The trigger to me would be the demerger of the FMCG business and clear plans regarding the non-core vertical because the tobacco business still contributes the bulk of the cash flows, though the operating margins in FMCG business are improving and now are in high single digits. There is a lot of hype around ESG investing and so the demerger from tobacco space and value unlocking in the FMCG space could be a key trigger for ITC. Other than that, the stock is a good debt plus investment bet for stability at these levels.
On RIL
One has to review RIL in terms of multiple businesses it operates in. In the last quarter, their oil to chemical (O2C) EBITDA was almost Rs 12,000 crore. There was recovery in the petchem margins — 35%-40% in polymers. Jio continues to be steady and is adding customers. In June, they added almost 55 million subscribers. Vodafone continues to lose share. So, there are multiple levers at work. Retail should pick up. I am interested in knowing how the OTC and the energy business pans out because more than 60% of EBITDA comes to the chemical sector. So, the consumer businesses already contribute 40% EBITDA.
Their plans on energy, plans on building gigafactories, the way they are incubating new businesses, the recent acquisitions they have done — all in all it is a good platform play. If any company in India is likely to hit a $500 billion market cap and eventually get into the $1 trillion club, it is RIL.
On IRCTC
The market seems to be loving all platform plays. IRCTC has gone up from Rs 2,000 to Rs 3,200 odd in the last four-five weeks. As the economy reopens that is how it is placed, but at 35 times sales, it looks pretty stretched to me from a near term perspective.
IRCTC is the highest transacted side in the entire Asia Pacific. So, while we assign a lot of value to companies which have access to actionable data, I think IRCTC probably is trying to catch up with that VC kind of methodology of value in companies on the basis of data and the web traffic. But even something like an Indian Energy Exchange has shown almost 40-50% move. So all platform plays seem to be in focus. But we have to be a little careful in the near term.
When the Nifty is at 17,300, one should be better risk managers than return managers. I am not negative on these platform plays, but I think in the near term, things are looking slightly exuberant.
On real estate & stocks like Sobha, Prestige
Lower interest rates and the entire home improvement scene is driving the sector overall. It is very positive. The real estate index has underperformed for more than a decade now. I like DLF. They have an almost eight million square feet launch pipeline. Their presales for Q1 actually surprised me. They made nearly 10 million presales, which means that they are on track for Rs 4,000 crore odd presales which they guided for. The balance sheet looks much leaner. They have one of the best rental portfolios as well.
Down south, we like Sobha and some of the other names. I prefer the home improvement, building material theme more than housing. From a long term perspective, something like PolyCab, paint companies and companies that make CVC pipestiles. The market is very unorganised and GST is driving formalisation in a lot of these sectors like sanitaryware and tiles makers.
Also, these companies have great return ratios, they are not very leveraged unlike a lot of the real estate names. So maybe from a long term perspective, home improvement and building material themes are better. From a medium term perspective, one can selectively look at some of the realty names.
Some of the real estate names have recovered very smartly. In the last one week, the realty index moved up in excess of 10%. Do you think that ancillaries, building materials, home improvement segments are a better way to try and catch the realty revival trade?
Absolutely. And as I said housing has almost 48-49 sectors linked to it. There are consumer durables, cement, paints etc. One has to be mindful of the valuations because anything and everything has gone up. Three, four themes within this building material theme which I like are; cable, wires and fast moving electrical goods. We are seeing a rapid formalisation here. A stock like PolyCab, despite a 3x run up, still has around Rs 30,000 crore market cap; it is transitioning from a B2B to a B2C play, much like what Havells did a couple of years back.
In tiles and sanitaryware, 70-80% of the market is still unorganised and we are seeing formalisation happening there as well. CVC pipes doing well. Also, there are some consumer durables like AC makers. One has to play the entire basket and be a little mindful of the valuations.
