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Sonthalia
, Chief Investment Officer and Director of the India Zen Fund, Motilal Oswal AM PMS, says AND Now.Excerpts edited:
The decline of the rupee and the rough appreciation are certainly a concern. Bad macros always offer you a buying opportunity, but right now, do markets ignore the importance of rupee weakness and crude?
This concerns the behavioral economy. There is nothing wrong with the fundamentals today, it is about short term feelings. REITs were sellers throughout last year and it was the domestic workers who supported the market. But of all these rumors about the appropriate level for the rupee, the real effective exchange rate suggests, in my opinion, 73 to one dollar as not being at all overvalued. So, basically, 73 is the appropriate level for the rupee. We know that short-term feelings can hurt the rupee, even from these levels. It's the top down. If there was suddenly a very large withdrawal of equity from the IFIs and this is not mitigated by domestic flows, then there could be some pressure.
That said, the pickups look pretty decent, the ratings are not excessive. Given the growth we are seeing, this represents an opportunity for purchase.
The bottom line of your portfolio is essentially financial and financial services tend to deteriorate as interest rates rise, especially NBFCs and wholesale banks. Are you planning to revise some of your sensitive rates while there will be direct implications of rising interest rates?
It depends on the ability of banks to pass on the rate hike in the system. NBFCs tend to be a bit more impacted in a rising interest rate scenario than banks, as banks inevitably pass on rates after a certain delay, if not immediately. Private sector banks have had a very good track record in recent years, as have NBFCs. This is due to problems in public banks, but there are short-term weaknesses as a result of this and there may be some compression of valuations on these names, private sector banks and NBFCs. Growth remains intact regardless of credit growth in the system.
By the way, it is already recovering and this also explains the good news of volume growth in banks. Margins will experience some sort of decline and a combined impact of these two factors will further increase the profits of many private sector banks and NBFCs by 15-20%. Housing finance companies seem slightly more vulnerable as the sector does not have pricing power and volume growth is not as favorable given the high risk of LAP portfolios and SMEs .
The markets are evaluating all of this, but the long-term growth trajectory of many and all these names seems rather correct. There is no reason to panic but we will have to live through the short-term fixes.
If you are looking to make the most of this market downturn, what are you doing? Do you buy lowering NBFC creams, do you buy more Bajaj Finance, Finserv or exit the HDFC banks of the world and invest for example by buying more than one ICICI bank or bank? Yes or Axis? ?
What you suggest is absolutely right. In the short term, these prestigious brands, such as Bajaj Finance, HDFC Bank, could exert some pressure, but fundamentally, the bank or Bajaj Finance itself has no problem. They are developing perfectly and there is a case where business banks are doing well in the immediate term in the short and medium term. But that does not deter from owning these basic names in the wallet. We understand that Diwali is going to be very good from the point of view of consumption. All of these elements will be reflected in many of these marquee names as well.
Value correction takes place at all levels, starting with consumers. There is no single sector in which one could say that the growth of the next two years is not fully taken into account. These are short-term corrections, I do not read them too much.
I imagine that all this is part of the government that provides tax incentives and a little populist before the next election. They brought significant visibility to the ethanol blend and we saw what he did on Friday for sugar. But do you think that sugar is the cycle on which you have to bet, especially with the clarity of ethanol blends? If stock prices are something to do, this seems to be the sweetest story of the market right now.
No, I do not agree with that fact. Of course, the ethanol blend will bring a break to sweets, but the end benefit will always come back to the farmer and regardless of global price movements. If the final product is a cyclical product, the cost of raw materials must be the only one possible because it is a political product and the cultivation of sugarcane generates a lot of emotions and feelings.
The dynamics of the sugar industry is very cyclical, very unfavorable and getting multiples of PE on this type of business would be very difficult. The mixture of ethanol is a respite, but even in this case, the sweets would achieve no benefit.
What is the possibility for metal stocks at a time like this? Even with global cyclical factors or trade war negotiations, how should we deal with Indian markets that are seeing a bit of a downtrend in the basket of metals?
The metal package is promising in the short and medium term, but having said that, the next two years of growth are already in price. There is no comfort of evaluation here. If there is a surge in commodity prices, thanks to many trade barriers and tariffs, etc., different countries with different frameworks for this obligation.
You could see an increase in the earnings of many metallurgical companies. There could be failures too but the evaluations are rather complete. Looking at the fundamentals and current prices, prices seem to be perfect.
What about oil marketing companies (OMC) and Reliance Industries? How do you envisage the retail trade as well as Rel Jio, the telecommunications branch? Is there a good price / quality ratio in some MOCs?
There is added value in OMCs. They pass the net margins into the market, we are considering an election year, Brent is getting closer to $ 80. These things do not weigh positively if we were in a controlled environment. But up to now, the rise in oil prices has been passed on to consumers and I believe the government is doing the right thing. We can not take risks on financial mathematics. The government reiterated that it will maintain the path of fiscal prudence that is good. From this point of view, we are still looking at a 15 to 20% increase in earnings for oil companies over the next two to three years, and valuations are no longer up to date. These are multiple single-digit PEs and very good dividend yields.
Of course, if the environment were to evolve into a controlled environment and crude prices rise very rapidly with the approval of Irans in November, this could have short-term implications for OMCs. But aside from that, there is certainly a deep value in all OMCs. We remain buyers in HPCL.
Regarding Reliance Industries, there is news about the split of the three divisions – the Petchem refining, retail and telecommunications companies into three different entities. The sum of the parts (SOTP) on the divided entities will be significantly greater than the combined value of Reliance Industries today. Retail companies will get high PE multiples, as they are without a doubt one of the largest retail distributors and we know what the assessments of competitive companies are on the market.
I am not so sure of the telecommunications business because the industry is not doing well and predatory pricing is the norm. Long-term strategies are put in place.
I think that petchem refining and retailing will be very valuable and much more than what current prices would suggest.
Would you like your arm in an action like Bharti because prices are not going to go down, volume growth is strong, consolidation has already begun. Sunil Mittal spoke to us two weeks ago and he said that any industry thrives on two things; pricing power and volume growth. Volume growth is there and if the pricing power returns or if marginal prices are also raised in the next six months, will we see a big comeback?
No, I do not agree with that. The fact is that, for the first time in history, since the mobile phone came into play, we have seen these companies declare a break-even point in EBITDA or a loss of EBITDA. That says a lot. Of course, I agree with the fact that volume growth will be there, but pricing is also very important because you have to fund capital expenditures on an annual basis. Spectrum costs will be incurred. Where will you finance the cash flow if you fail to balance even at EBITDA?
The competitive environment is very unfavorable so to speak. Some players want to gain market share at the expense of pricing, so as to gain long-term benefits from this sector. The sector will have problems with future cash flows and, of course, if this is the case and ROE is a single figure, OCR is also anemic. It is much lower than the cost of capital or the cost of capital. Creating value for shareholders is not justified, even if it is to list Africa or something like that. I do not really see much value in any of the telecom names currently.
You own Titan and some consumer names like VIP. You have also owned niche players from niche consumers. If crude prices and interest rates rise, it may not be a quarter but two quarters of consumption. If this is the underlying trend where interest rates are rising, the fuel bill will start to weigh on discretionary spending. Is it a matter of time before we see a slowdown in consumption and PE compression in the world's Titans, VIPs and Jubilant Food Works?
The IPC is heading down. In the first quarter, our GDP growth rate is 8.2%. We all know that the investment cycle is not recovering. So where is the money going? He goes into consumption. Look around the retail brand, multi-brand retail, grocery retail, apparel retail and QSR. I am not talking about stock prices, but numbers that many of these companies report.
If you believe these trends are going to reverse in a quarter or two because oil prices have gone from $ 40 to $ 80, I do not think that will be the case. The economy continues to grow. Our per capita income is $ 1800. It's a $ 2.5 trillion economy, compared to $ 2 trillion two or three years ago. Is this process reversible? I do not think so. RERA, disorganized at organized work, all this will be played out. It's a matter of time before the market starts to realize these facts and accurately evaluate them. I think that there is a long way to go on this track.
Have you changed the positioning of your portfolio or are your first three stocks still the same?
So, we come on your channel every seven to ten days and we do not make changes so often. Everything remains intact right now.
So what are your top three positions?
They remain the same, that is Kotak Bank, Bajaj Finance, Page Industries. So, the first three positions continue to be the only ones.
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