A Morgan Stanley report is saying that the recovery in rural India will surprise us. Bhavesh of Ola yesterday tweeted that the mobility number in Ola has also picked up. The CLSA report last week talked about all India mobility numbers including rural India picking up. Is it a good time to buy rural-based NBFCs and low cost housing stocks?
I definitely think so. Some of these rural focussed NBFCs had not participated in the entire run that we have seen in the last 12 months either because of their own NPA related issues or the fact that the growth visibility was missing. But as you very rightly mentioned, some of the recent data points, particularly the freight rates in the last 3-4 months show a decent amount of increase in the entire logistics part. That is telling us that there is a good growth momentum which is building in.
If you look at the recent update of Mahindra Finance, both in terms of growth as well as collection efficiency, after a long time, there is far better visibility going into the next few quarters. I definitely think that people should relook at it, particularly the ones which have not really participated. So within the NBFC companies universe, we have been liking companies like Chola, Muthoot Finance — which is more of a gold finance play and has some correlation with gold prices.
Within the smaller ones, we like M&M Finance as well as L&T Finance, which have to some extent not participated as much in the entire rally that we have seen.
How about buying two-wheelers as that depends on how well the rural economy is doing? I understand that EV disruption is round the corner but how many of us are actually going to buy a two-wheeler for Rs 1 lakh just because it is electric? The two-wheeler space will get disrupted but it will not change for next two, three, four quarters?
I agree that the electric vehicle part is a little bit away but we have to reckon that the market has become far more dynamic in terms of adjusting to the trend which may unfold over the next three to five year. The way to approach the entire two-wheeler issue is to look out for companies which are going to be least affected by EVs and within that theme, Bajaj Auto looks to be a far better play because of TVS because of the kind of exposure that they have to the scooter market where the EV could be a big disruption. We think it would make sense to stay away from it.
We like Hero Motor valuations, but the growth is missing. The data points of the last few months show that the two-wheeler segment is not reflecting any sort of a demand revival. So if we have some positive surprises, definitely Hero Motor could be an interesting space to look at. At this point, we would be more comfortable buying into either Bajaj Auto which is more like an export story or stick to names like Maruti where the entire chip related issue is short term. Overall, once we have some positive signals, the story should do extremely well from a six to 12 month perspective.
The consumption pack has large names. In the last two-three years, the focus was on HUL, Asian Paints. They went higher and higher but have moderated and now smaller companies, more particularly Tata Consumer, are outperforming the pack. How would you look at the entire consumption space?
The consumption theme is again back in the reckoning and after underperforming for a brief period, when the entire BFSI, metals and IT sectors were doing well, now interest is coming back in this sector. More importantly, the first quarter’s numbers and the management commentaries on how growth is emerging on both rural as well as urban side are giving a lot of confidence. Also, the way some of the companies have managed the hike in the raw material or the commodity prices is also giving a lot of comfort. We think investors should consider a decent amount of allocation when it comes to the entire consumption/FMCG plays.
Coming to Tata Consumer, what is important to note is the way the company has transformed in terms of distribution reach and particularly some of the categories like salt. The overall growth drivers are too high and one is looking at significant growth in categories like Sampann and salt. We think there is going to be a good amount of interest for a company like Tata Consumer from investors’ perspective.
Telecom is a strong two player market now with Bharti and Reliance Jio taking the major market share. What are you making of the sporadic trading moves in Vodafone Idea?
We should wait for some clarity on what sort of relief the government is contemplating for telecom companies because when we look at a company like Vodafone-Idea, the cash component is just Rs 6,000 crore. The company is sitting on a debt of almost about Rs 1,80,000 crore and the market cap is hardly about Rs 24,000 crore. So though we may get a little excited about the fact that the relief is coming through, we have to see that in the context of what is the sort of infusion or capital support that a company like Vodafone requires versus what is it that the government could possibly look at providing them.
This is a low priced stock and so a lot of retail investors prefer less than Rs 10 kind of stocks. But unless there is some concrete development in terms of the revival of the balance sheet and the debt part, I do not think one should bet too much on Vodafone-Idea per se. Our own view has been very clear, stick to Bharti and Reliance. After the capital raise news from Bharti, we have seen some action. So one should stick to those two names in the telecom space with a good amount of allocation.
BPCL is not going to be divested any time soon. Why is the stock still holding on?
We have to see that in the context of what sort of price hikes these companies have taken, versus what kind of valuations these companies are commending. Of course, divestment has historically had its own challenges and timelines. When the market is at an all time high, then somewhere, people would want to look out for the PSU stocks where the companies are doing well and eventually we might see a bigger trigger because of divestment.
But on the basis of earnings, valuations and dividend yields, some of these companies could definitely merit a decent amount of allocation. We like both BPCL and IOC. They have not been outperformers but at these frothy valuations, there is going to be a lot of interest from investors to look out for a company which is very reasonably valued and which offers a good amount of protection. BPCL and IOC both fit in.
Some fund managers are advising not to buy ITC for its tobacco business and ESG compliance. But when I check some portfolios, Coal India has made a comeback. NTPC has made a comeback. What is going on? Is the ESG template slightly blown out of proportion?
The fact of the matter is for a company like ITC, there has been a significant underperformance vis-a-vid market over an extended period of time. Also some sort of de-rating has come through. Now whether it is because of the ESG concerns or because of the way the company has not been able to transform their entire business model to have a slightly higher component of the non-tobacco business — it is not going to be a stock where we will see a big outperformance. It has always remained a stock which is going to give a decent dividend yield with some sort of stability. At these levels, I do not think it is the wrong way to look at it. Companies which have not performed will give that protection and dividend yield. Within that theme, companies like ITC and Coal India are very much fitting in.
The PLI scheme is going to augur very well for the likes of KPR Mills, Welspun, Trident etc. as well?
Even without the PLI benefits, the performance of some of these textile companies have been goos mainly because of the China plus one theme. Some of the textile companies, particularly the exporters have registered a decent amount of market share gains and we believe that the PLI scheme would add to that positivity, There is a long way to go in terms of how these companies can build the capacity and how that entire ecosystem can play out extremely well for us, given that textile has been our forte and strength.
We think that the combination of China plus one plus a PLI theme would invite a lot of attention from investors and so companies like KPR Mills, Welspun India, Trident and the entire garment and the yarn manufacturers would have some sort of a positive rub off on the back of that. We should continue to be very positive about that space.
The one pocket that we have been highlighting is the real estate demand. Do you have any stock idea from the building material or the home improvement segment?
It would be good to have a small four-five stock basket which will have one or two good real estate names — something like Godrej Properties or Prestige or Brigade — and some of the housing finance companies like HDFC, LIC Housing and the paint companies. The growth outlook given by the Berger Paint CEO is quite phenomenal. The consumer and paint and building material companies are talking about solid growth coming back.
I definitely think that it would make a lot of sense to have a five-seven stock basket with some allocations towards these three to four ecosystem related themes. It can give a very decent upside from a next 12 to 18 months perspective.
