Gurmeet Chadha’s 3 FMCG and industrial picks
I have been staying away from value traps and price correction is not value buying
What is your view on Reliance?
The stock price movement is probably reflecting the expectations. The refining margins have recovered. The Singapore benchmark for last quarter is already above 6.5%. Reliance as per all brokerages is expected to report anywhere between $9.2- 10 and that will give a big boost and help them offset some flatness in the petchem business.
I will be more interested in seeing how the consumer facing businesses do. The Jio ARPU is something I will watch out for. They are expected to add about 2.3 to 2.5 crore subscribers. We have just seen an announcement of the charge on the IUC which probably will not reflect in the last quarter but in the coming quarters. It would be interesting to see the retail business see because it is cyclically, a weak quarter, especially this Q2 in light of the monsoons and other reasons.
But I expect them to report a good set of numbers we would also be interested to see the guidance on the capex and debt reduction. A lower capex intensity along with some guidance on the Saudi Aramco deal will be bigger triggers than standalone numbers. I expect profitability to be good and a lot of it is already reflected in the price.
There is a lot of excitement around divestment. What started off with BPCL, has rubbed off on BHEL as we are exclusively picking up that maybe that stake sale is going to be next on the cards. NMDC’s name is also flying around. Is this an investment opportunity or a short-term trading move?
It is a combination of both. In some places, it would be tactical, in some case it would be an investment opportunity. Something like an SBI is more an investment opportunity. I expect the NPA cycle to bottom out and if you have a slightly long-term view of say two to three years, you will see a lot of recoveries. You will see gradual improvement in credit cost.
We are already seeing a flight to safety even in deposits and liabilities and the delayed transmission will help them sustain NIMs. The retail focus is very evident when you visit branches and do channel checks across leading branches. Something like Container Corporation is an excellent to look at even from a medium to long-term perspective. The dedicated freight corridor according to me could be a big game changer there.
The kind of infrastructure they have, the kind of reach they have and the fact that they want to migrate from just railway freight operator to a multi-modal logistics player, are all attractive features.
A good private player coming there will add a lot of credibility to the name, other than a great infrastructure. They have some 23,000 wagon containers, some 80 terminal ports. It has a very high entry barrier as well for somebody to come in. Tactically, there could be oil marketing companies also because we have already seen the runup happening.
The grey market news is a lot of players are interested at around Rs 700 plus for BPCL and the government’s commentary on ONGC being free to decide what to do. People are interested in HPCL also. We only concentrate in oil marketing space, purely from a refining point of view. They also have great marketing infrastructure. BPCL has guided for a 200 bps increase in market share. There are seven strategic business units other than the pure oil marketing space. Tactically, OMCs and from a long term view, may be SBI and Concor.
Did you go through Zee, not the earnings which are immaterial right now but what they had to say about the cash flow?
Absolutely. The writeoff of about Rs 170 crore, an FD being liquidated due to a related party transaction and the rise in receivables obviously leave a bit of a concern. Right now, while we keep discussing slowdown in the economy which is on the demand side, one key trigger for the market is the return of risk capital.
If you see there is a complete lack of adequate risk capital. Until such time, all the value themes -- whether those are beaten down NBFCs, something like Zee or others -- would fail to go up. Just look at the spreads we have on the credit side. You have a AAA issuer borrowing money at 7.5% and then there are people who are struggling to raise money and the range can vary.
Look at the term spreads, despite repo being at 5.1% you have the 10-year G-Sec at 6.70% and AAA and 7.5%. These spreads indicate that till the time financial stability returns and the credit events are addressed, we will not see a broad based revival. That is why you are seeing this divergence coming through.
Coming back to Zee in particular, there are reports of lenders meeting Zee today and since the silent period is over, post results they are looking to offload additional stake both in media and non media assets.
My news as per my discussion with fixed income managers is that there a couple of non media, endowed assets which are also on block and some of them are trying to get early payments because of the pressure they are facing on their debt funds as early as October end and mid November.
The best strategy right now is to just wait it out. This is not the time to experiment and the correction is also very technical because if another lender decides to invoke the pledge, you would see another correction coming on very thin volumes.
What do you make of the FMCG pack?
There are two companies which understand the dual markets best which is HUL and Dabur. At current price, for HUL, risk reward from near term perspective may not be very favourable. It is more a question of what do you pick, 40 maybe 45 PE versus maybe 60-65 PE. So, I like Dabur at these levels.
Ever since Mohit has taken over as CEO, it become very aggressive versus a very defensive approach they have had since 2018. They have a great portfolio. There are three brands where the turnover is more than about Rs 100 crore and they have about 15 brands where they are clocking Rs 100-crore turnover.
In last four-five years, their operating margins have gradually inched up from 14% to almost 20% and any recovery in rural because for Dabur almost 45% revenues are rural, will immediately start reflecting. The fact is input prices have been soft and commodity prices have been soft and a lot of cost initiatives have been undertaken,It could be a good play. \
ITC while it is more tobacco than FMCG, but the market probably thinks that the fiscal slippage could lead to some rise in duties for tobacco which is predominantly the main business and that is probably why you are seeing the stock being very flat in the current upside.
Maybe for now, it could be Dabur and a slightly different play like Tata Global Beverage where tea probably contributes more than 50%.
What do you make of some of these names that have really corrected-- the likes of Indiabulls, Yes Bank. Do you see any interesting pockets there?
For almost two quarters, I have been staying away from value traps and price correction is not value buying, especially when there is concern on governance and on related party transactions. The market is very brutal. My view is to stay away.
Amongst the lot, maybe one can look at some of the NBFCs which are probably more retail focussed. They are not big wholesale lenders, have a more diversified stream of revenues, have a good mix of SME, CV and the housing book. Those are the ones which are better placed, something like a Motilal Oswal and L&T Capital, even HDFC Ltd. If you take out all the subsidiaries which right now are valued at Rs 2.7-2.8 lakh crore and still apply some holding company discount, it is still available at 2.5-3 book which is not really outright expensive.
The stronger ones will keep getting stronger. If you want to do a bit of value buying maybe you can look at some industrials like cement. There are reasonable valuations, consolidations, increased price focus reflected in numbers of ACC.
So maybe some industrials where there are sound fundamentals at play and once the investment cycle turns, are a better value buying rather than just chasing absolute price correction.