There is no need to go down the quality curve and while value hunting, be selective, Dipen Sheth, head, institutional research, HDFC Securities, tells ET Now. Edited excerpts: Between heartening surges and heart-stopping plunges, 2018 has been a very volatile year. What do you think the important trends of 2018 will indicate for what could have happen in 2019? 2018 has been a very challenging year for investors if we look at the broader market. The Nifty has gained 3-4% over the year but it has been highly volatile during the year. We have seen a peak of something like a plus 13-14% return from the point we started. We have plunged down to close to 10,000 in September-October. We have had a couple of fundamental events on the political front as well as on the business front with the NBFC crisis spilling over. So after the 29-30% gain over 2017 which I would say was a free ride, maybe this is not such a bad outcome and we need to take solace from that. Again this is only if you look at the headline index which is Nifty. But in the broader market, there has been a veritable carnage. If I am not mistaken, there is a recent study which says that this cue has only gotten worse across 2018 and what was costly has become even costlier on a relative basis as we moved across the year. Maybe finally, we are at a stage where some value hunting is called for. That is perhaps the mindset with which we need to approach 2019. It does not mean that we go down the quality curve. Of course, the argument is that quality is very costly almost everywhere but that may not necessarily be the case. The set-up for 2019 looks to me like a call for hidden quality or turnarounds in cheaper stocks where a performance turnaround can be betted on and where you can make a case for a re-rating. Maybe that is the way to look at markets here. I do not think there is very big money to be made in some of the costlier stocks. While we might have buys on many of them as a broking house, but just look at the numbers -- Lever at about 52X on F20, Titan at 31X, Havells at 39X, Britannia at 51X, Kotak at four times price to adjusted book net of subs despite the recent crack in the stock. I do feel there is a value trade coming up but one needs to be very selective. I completely agree with you that in stock market, you have to buy gold at the price of silver and right now if you are buying some of these quality stocks, you are buying diamond at the price of gold. But we have argued this in 2017, in 2016 and even in 2015.. It is not that I am asking you to go down the quality curve here. All I am saying is there are lots of stories that deserve higher multiples or will soon deserve higher multiples if some investment thesis that brokers like us or researchers like us are betting on, If these events do play out, then there is certainly a case for re-rating. What happens is that when you go through an earnings or a margin expansion, and it is backed by a multiple or a valuation change, then you get the double whammy of a very sweet ride up and that is the way to really make the big alpha in this market. It does not mean that I do not like the great companies going at high valuations. For example, TCS continues to be one of our top picks. We changed our mind late on that one but we said well better late than never and despite the stupendous run that TCS has posted, it is good for another decent run here on. You had said ITC is the cheapest among the FMCGs but could this be the go-to story amongst the Nifty 50 names aside of TCS that you just highlighted? Yes and there are several reasons for this conviction or belief. Frankly, the story has not changed much. ITC is the cheapest stock in the FMCG/CND or consumer nondurables universe. It has been punished for being in a sin industry like cigarettes is par for the course. But it has been punished unfairly, The kind of discount at which it is trading to Lever or Britannia or a Colgate for that matter, is simply uncalled for. We are at something like 40-45%, 50% kind of discount, 50% discount if memory serves me right. Maybe that is a little too much that is one bit. The other bit is that you could give it this discount when it was going through a sluggish phase in the business. Even if not in terms of earnings, then at least in terms of volume growth which is how people look at consumer non-durable companies. Some of that is changing. After a six-year volume de-growth cycle for the last two quarters, we have actually seen volumes coming back in the low to mid single digits at ITC and that should get the pessimists to my side. The tax oppression cycle which was at play, actually drove down the volumes. I guess that cycle is coming to an end now with GST and there is a visible way forward for the next four or five years on how tax will be imposed on ITC. Of course, it is not beyond the capability of any government to get back to tax oppression. But it is a little unlikely. Also, there is non-cigarette business of ITC. ITC has a close to $2-billion FMCG/foods business and we are just at about 2% or so margins there. The critical mass has long been crossed and it is time ITC delivered on that front. The hotels business which has not really done too well in the past is poised for a very strong cyclical turnaround. It is all coming together for ITC right now and at a headline valuation of something like 24X or so on F20 numbers, there is nothing to lose in the stock. As you move into 2019, you encounter global uncertainty. This can be a very good place to hide.In your latest note I see an interesting name, PNV Infratech. What interests you about this story? It is at the other end of the risk-reward spectrum. Infra stocks have been mercilessly beaten down over the last three or four, five months or so. Many of them were of course, trading at unfair multiples of 18 and 20X. We have seen the large names going down to less than half their peak prices. And there is some justification for a derating of multiples in the infra space but remember, this infra cycle in India is unlikely to be broken materially by any government that comes to power, not just this government or a coalition version of this government. One, all the political dispensations in the country have figured out that spending on infrastructure has electoral benefits. Two, companies like PNC Infratech in specific are sitting something like 7X, 8X book to bill ratios. They are not consuming capital like it used to happen in the earlier infra cycles. Some of these companies are very well managed and PNC, KNR of course, comes to mind in this regard, but PNC also falls into a category where capital consumption trails growth and in fact ROCs are maintained and cash flows are relatively cleaner compared to what they were in the last infra cycle. If you take away the value of its infra assets, the stock is available for some 7X or so on FY20 basis on core earnings. The money that it requires to fund its HAM products will really drive its top line because it is the HAM projects which will result into much of the standalone revenues. The Rs 500 crore-odd that it needs to invest into its HAM projects is going to probably get freed up on its balance sheet through strategic sale of its current infra asset portfolio. The visibility, the confidence on execution, the fact that PNC is now moving beyond UP in a big way also and that 8X book to bill execution strength, revenues having reached some kind of a bottom in terms of year-on-year growth in the second quarter, bodes very well for PNC Infratech. The headline risk is if a new political dispensation comes in and there is a little bit of victimisation, the company may go nowhere but that is why I said it is at the end of the spectrum in terms of a risk reward ratio. Our target price for PNC Infratech is as high as Rs 270. Can you just take us through the rationale of this one and would you pick out some of the other names within the sector as a whole?Sometimes, when you have a sector which has got multi-year growth and penetration potential and you have a clearly established sector leader, you do not have to think too hard. Multiples may not look very exciting and I remember the time when Lever used to trade at 40X people were saying how it has delivered all that it could have delivered and here we are at 51X! Voltas is going to go through that phase. Remember that Lever is actually in a highly penetrated category. Much of its product categories -- whether it is personal products or soaps and detergents and so on within the FMCG portfolio are reasonably well penetrated in the country. If you look at air-conditioning market, the room AC market is still in mid to high single digits in this country and obviously it is a discretionary spend for Indian households and offices. It is a spend that is going to become increasingly the norm as we move forward over the next 10 and maybe even 20 years. Some of that will obviously flow through to Voltas as it is the clear category leader and the brand leader. It has got 15,000 touch points and is the best positioned to benefit from the secular trend of Indians aspiring for more comfort in their day-to-day lives whether at home or in the office. It has got very high core return rations of something like 45% ROIC and very clean cash flows, a brand leader, consistently gaining market share well above 20%. The tieup with Beko will again get other categories in the product mix think we are not afraid to assign something like a 35X to its core air-conditioning business to suggest that this should be a permanent part of any long-term portfolio in the country. There are two serious underperformers this year -- Tata Motors and Infosys. Which one will make a comeback? The fundamental strength in the business model is much more visible right now at Infosys as it does not have to grapple with an existential crisis anymore. Both companies have gone through that. Infosys did not suffer as sharp a derating as Tata Motors for the simple reason that it is in a business which does not end up consuming capital and burning cash flows like Tata Motors or specifically the JLR part of the business at Tata Motors. For a long time, JLR was contributing 85-90% to the overall enterprise value for Tata Motors and therefore it was heavily levered to a discretionary consumption play which was being betted on to gain market share consistently in a highly competitive environment. Some of that came apart over a period of time. I do not think Infosys falls into the same category, at all. Core return ratios are well in excess of 30%. The company was cash rich. They went through a management strife but fortunately the business did not implode. The inflows of orders into the company and its execution engine which was Infosys was always famous for did not stutter or stumble and it got through this transition. Now it has got Mr Parekh in charge and the first few bits of news flow and developments that have come in from Infosys are more than encouraging. The stock has actually run up from the time it got derated in the times of its management or board strife. The worst is behind Infosys very clearly. It is actually set for a very good run driven by the fact that the end markets that it services primarily the United States and of course, large swathes of Western Europe. The broader economic prospects for these markets are reasonably positive even today. The transition to digital is happening slowly and steadily. Our finding is that the transition to digital should not be a worry for Indian companies, legacy is not falling off as fast as is feared and Indian companies are picking up digital skills faster than what we or you or I would have thought. All this bodes well for Infosys. It is a very steady play for the longer term. Again, like Voltas, there is no way that you can avoid putting Infosys into a long-term India portfolio at this point of time. As for Tata Motors, unless it gets something right in terms of getting the volumes back at JLR and controlling the margins and that crazy capex spend, that it is sitting on, we are in for trouble and that is exactly what the stock price is telling you.
from Economic Times http://bit.ly/2TjZInI
No comments:
Post a Comment