Reliance Industries on Wednesday informed in an exchange filing that the company will restructure and repurpose gasification assets as the RIL board has decided to implement a Scheme of Arrangement to transfer Gasification Undertaking into a wholly-owned subsidiary. What did you make of that?
Reliance is into many sectors and many businesses and from time to time they would look at restructuring, M&A activity and various other actions to add value. One may expect some news flow on this count but the big disappointment of course was the O2C chemical business hive off and maybe getting a strategic partner over there now been put off for some time. That was going to be a trigger for the stock to move up higher but may not at this point of time. So I would not read too much into the news at this level but something very positive happening for Reliance is the way the telecom industry is shaping up. With higher tariffs coming into play, certainly all eyes are on Reliance Jio as to when they would start hiking their tariffs. Typically these are very high operating leverage businesses, so if the average revenue per user does move up, a lot of it will flow to the bottom line. So that is very positive for Reliance from that point of view. After many years, we are seeing the benefit of consolidation taking place in the telecom industry and all the three players will report very good revenues and profitability from December quarter and much higher from the March quarter onwards.
Two days on the trot now we have seen stock recover. Would you still be a buyer at Paytm at these levels of Rs 17,00 odd?
Not really. Paytm needs to spend some time explaining to investors what their exact business model is and the route to profitability going forward. There are many doubts about various kinds of service offerings and how they are going to play out for the company. The losses keep on increasing for the company and that is where our disappointment is. Maybe, Paytm has got listed a bit ahead of its time. It should have remained private then maybe would have created higher value but at this point of time, we are seeing a lot of disappointment the way the IPO has played out. At the end of the day, it is not clear how the route to profit is going to be.
There was this craze for specialty chemical stocks. While people are talking about the great returns some of these stocks have given in the last couple of years, in the last one month, 15-20% is the average correction for all specialty chemical companies. Some of the stocks had gone to PE multiples of 60-70 and even 80 times one year forward. What is happening in this space? Is the excitement about China plus one overdone?
The China plus one investment theme caught the fancy of many investors and after many years of underperformance, we saw a lot of action in specialty chemical companies which was backed by solid earnings growth over the past three to four years. But the last couple of quarters have shown that there are chinks in their business model. As and when basic material prices move up, they are not able to pass it on that easily essentially because these are B2B businesses and therefore we have seen a huge correction and compression of their operating profit margins.
So maybe the Street was a bit ahead of itself and these companies got valued at a very rich price to earnings multiple and we are seeing a correction over there. This correction maybe even deeper from these levels and another 10-15% cut in many of these specialty chemical companies cannot be ruled out.
But at some point of time, after a 30-40% correction, we may find some equilibrium because the long-term prospects are excellent and once they tide over this cost increases in their input and raw material prices, the overall prospects are very good. We are seeing more receptiveness from global companies for sourcing specialty chemicals from India. The long-term theme remains pretty much intact but next few quarters may be quite disappointing for specialty chemical companies and one should get a bit cautious on that count and maybe want the PE multiples to compress a little bit to have a better risk return profile.
Where do you stand on ? Can one continue to add it on dips?
A lot of positives have got priced in. When it was trading at half its price, it was an interesting opportunity because they were going aggressively into renewables. Other aspects which one needs to highlight here is that Tata Power is focussing very heavily on distribution as well and that is perhaps the most profitable part in the entire ecosystem as far as power generation or the energy business is concerned.
There was a mild disappointment, they scrapped the plans for converting their renewable assets into an investment trust but that option is still open. My view could be challenged if the renewable assets get hived off into a subsidiary and they get a strategic investor over there or a private equity player. The valuation is significantly higher than what the Street is pricing in just now and that is the risk factor on the upside as far as Tata Power is concerned.
But by and large, a lot of the positives have got captured in. At the end of the day, power generation is a low ROI business, it is an utility business and certainly there are opportunities on the renewable side but the stock price has moved up on that count.
Maybe for the stock to move up higher we would need some more clarity on strategy for expanding the electric vehicle or the electrification infrastructure which Tata Power is looking at seriously implementing.
For the time being, considering the price and the risk return profile, I would give Tata Power a pass.
Is there too much bullishness or optimism in some of the EV dominated stocks now?
I would think so. Tesla has completely captured the investors imagination and the way anything to do with EV is trading, certainly is a bit surprising. So far it is not mainstream and has not really got into a lot of the portfolio of investors but maybe the Street is a bit ahead of itself as far as electric vehicles are concerned.
Unfortunately, the emergence of EVs is depressing the price to earnings multiple for traditional auto OEMs. Whether it is a Maruti or Bajaj Auto or Hero MotoCorp, they have their own EV plans but investors are now trying to have a lower terminal value for auto OEMs which are based on internal combustion engines. So rather than focussing and giving more opportunities to invest on the EV side, we are seeing the entire EV revolution having a negative impact on auto OEMs and that is something which investors need to take into account. It looks like a bit of a bubble is being formed over there.
