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Earnings of consumption stocks like Nestle, Unilever as well as Dabur, irrespective of the slowdown, seem to be telling a very different story, as is the management commentaries?
Yes, now the result season is almost over. We have seen that the consumer pack on an overall aggregate basis have reported more or less in-line performance. Management commentary did indicate some signs of revival in volume on the back of better-than-expected demand and volume growth in the festive season.
Q3 to that extent is looking a little better. If you see, most of the companies have reacted positively and some of the larger ones are trading at a very high valuation. In that space, Colgate features among the better valued or attractively valued on a forward basis. It is trading at about 42 times compared to the average MNC FMCG pack which trades at anywhere between 55 and 60 times. We have seen that growth improve in the past few quarters. They have started gaining market share and that is one stock which is not among the largecaps but it is of a decent size with a good MNC backing and a good product line, where there could be a decent upside in near term.
We were also talking about the kind of exposure that some of these banks have to the telecom space. Given that we have seen all of this news play out, it is going to have a ripple effect, For instance, Union Bank’s percentage of loans in telecom is nearly 5.2%, HDFC Bank 2.7%, IndusInd Bank has exposure of close to Rs 8,800 crore. Is that a bit disconcerting for the banks’ exposure to the telecom sector?
Yes definitely. The way things are going on in the telecom sector and going by the news headlines where one of the larger players has been talking about possible bankruptcy, this will definitely have an impact on most of the banks with exposure.
"In the entire OMCs pack, the preferred pick has been IOC not only because of its size but also because it has been one of the best operationally efficient oil marketing companies."
The only factor is we do not know how much of this exposure is towards Vodafone or Bharti Airtel or Jio. We just know that with overall exposure towards the telecom sector, banks which have exposure towards Bharti Airtel whose balance sheet is relatively better off would maybe sail through, while banks which have a higher exposure towards Vodafone-Idea, which looks like having more trouble in financing, could have some ripple effect. That will be an additional pressure on some of these corporate banks over and above the existing issues that were playing for quite some time.
News is that the government is now mulling to cut stake in IOC to below 51%. Do you believe in anticipation of this government stake sale, it would become a buy for IOC?
In the entire OMCs pack, the preferred pick has been IOC not only because of its size but also because it has been one of the best operationally efficient oil marketing companies. It has one of the best free cash flows in terms of the business. The capacity expansion plans for the company has been giving good growth visibility. All these put together, IOC was our preferred pick in the OMC pack. with a decent upside, especially after the up move seen in the HPCL as well as BPCL.
Now one big difference is based on the news that the government is looking to reduce some stake in IOC compared to having divested its entire stake in BPCL. The question that is arising is will someone be interested in having a minority stake? There are questions regarding subsidies and the pricing of fuel if the crude price were to jump higher. Those kind of challenges will be there and those questions need to be answered before any international oil major would be interested in taking a minority stake in such a company.
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