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Jio emerges winner as telecom cos hike tariffs: Prateek Agarwal

Tariff hike good for fisc, good for banks but very little free cash flow retained by Airtel or Voda.

ET Now|
Updated: Dec 02, 2019, 12.04 PM IST
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Jio is the net beneficiary of tariff hikes in terms of cash. Unlike Bharti Airtel and Vodafone Idea, Reliance does not have to pay anything to the government, says Prateek Agarwal, Business Head and CIO, ASK Investment Manager. Excerpts from an interview with ETNOW.

Just looking at the kind of moves that one is seeing in YES Bank. I do not think this big bid of $1.2 billion by a mysterious investor is going down too well with the market. It is turning out to be more of a buy on rumour, sell on news kind of story?
It is an entity which is under some stress. It will be good if the market gives it some time and looks the other way.

Following tariff hike announcement, Bharti is at a three-year high, Vodafone is up 20%. What are the markets so excited about? Should we remind the bulls who are buying Bharti that the AGR problem is not solved and they will have to pay for 5G spectrum also?
On telecom, the tariff hike is higher than what the street expected and may be, the market is pricing that in. Second, in spite of the higher hikes, most of the money will go to the government. So, it is good for the fisc, good for the banks who lent to the space but very little free cash flow will be retained by the players in this space, apart from Jio. So, Jio is the net beneficiary in terms of cash. They do not have to pay anything to the government.

Looking at the way some of the motown numbers have panned out. There are some who have managed to beat the street by a slim margin. What is your overall reading of the auto sales numbers?
It was expected to be soft. We expect it to continue to be soft till April-May 2020. While the low base starts to support as we go forward, it is expected to be soft because of higher uncertainty. This is a discretionary spend and a large ticket one at that. People would be happy to postpone. On top of it, the overall cost of ownership in metros which still account for close to 40-50% of the car sales, is going up very sharply in terms of fines, parking charges and purchases itself. All that hurt sales.

What are you making of this tariff hike by the telecom companies? This morning they are seeing double digit gains across the board.
Yes, this is what I was trying to say. The Street expected it to be closer to 20% hike but it turned out to be higher and that is getting priced in. But then, if not all, most of the tariff increase goes to the government. Very little amount gets retained by the telecom companies except Jio. The big thing that one needs to see as we go forward is how much is the increase that Jio does and what is the dynamics of subscribers, if they move from the other two players into Jio. A lot of the positivity may just fizzle out.

What are you doing with your clients money fully invested, sitting on cash, or hiding in quality?
We are always quality focussed. Quality stocks benefited immensely from the tax cuts which happened and that benefited our portfolios. We are into smaller ticket consumption items which are holding up better than other parts of the market. We are in businesses with pricing power and they are benefiting from the lower commodity prices. A very large part of our portfolio delivered gross margin increases and yes we are with financials.

In quarter two, our portfolio earnings moved up by 22% on PBT and over 35% on PAT. We believe that given the overall weakness in the economy -- both domestic and global -- the trends could continue into the third quarter and beyond. As of now, we are happy where we are.

How strong is the merit in the entire PSU divestment story? Are there investment- worthy bets here?
Some of the PSU names which are being privatised are good, not all. BPCL is a great asset for anybody who buys it. Concor is a great asset, though it does have some issues to take care of.

The stuff I believe comes from the railways. These might have to be absorbed. A lot of linkages with railways exist. It is a more difficult one but very high quality PSUs have been put up on the disinvestment list. It reduces the crowding out in the secondary market and gets in fresh money from abroad. Most of these may be bought by outsiders which brings in a lot of dollars. We are clued on this as well.

Over the next six months, you could have a BPCL, Reliance petrochem and refining (20%) and Essar Steel sale. That could push up the normal trickling in of FDI further by $25-30 billion. That is something to look forward to as it brings in liquidity into the system, stabilises the currency, if not strengthening it. It could bring down lending rates also. If the pressure on the secondary market goes down, it benefits everybody including good quality PSUs and the banking pack as well.

Also Read

Why Prateek Agarwal is avoiding commodity and PSU stocks for now

Market to sustain, consumer and financial stocks best for growth investing: Prateek Agarwal

Expect 10-15% returns on indices in next 2 years: Prateek Agarwal

Brace for a weak Q2, buy on dips: Prateek Agarwal, ASK Investment Manager

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