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There’s a case for derating in Infosys in the short run: Hemang Jani

Would it be possible for a few people to do away with certain governance practices in a co like Infosys?

ET Now|
Oct 22, 2019, 10.47 AM IST
Hemang Jani-Sharekhan-1200
Overall, the sentiment has turned positive for the PSU stocks and any investor would be more than happy to give a 30 to 50% premium to BPCL and some of the other stocks, says Hemang Jani, Senior Vice President, Sharekhan. Excerpts from an interview with ETNOW.

PSU stocks have been completely side stepped as ugly ducklings in the market, but given that the government is seriously considering selling stakes in some of the PSUs, is there money to be made in PSU stocks and if yes, which one?
Timely action that has arisen out post corporate tax cut proposals, is extremely positive for the sentiment in PSU stocks, but more so for the ones where the balance sheets are in good shape and where serious global investors or some of the domestic investors could be considering for investment purposes. These are the stocks where there is a case for rerating and which have been shortlisted, something like a BPCL or a Concor and may be some more.

I definitely think there is going to be a serious rerating because when you are talking about giving away the management control and the companies in question are large players in their respective domains, then one would be willing to pay a substantial premium for BPCL though the stock has really run up over the last one year. But given the fact that it has a certain market share distribution network, both marketing and the refining business per se, any investor would be more than happy to give a 30 to 50% kind of a premium and that may be the case with many other companies.

We have to look at each company to arrive at a fair value that one would be able to give but overall, the sentiment has turned positive for the PSU stocks.

Should an investor get into Reliance at these levels? Do you wait for further unlocking or do you get in now if you are confident that it is going to come through?
For Reliance, people are excited about the new businesses and out of four, in three businesses, the company has delivered better than expected numbers and more importantly, the focus in the market is on demerging or value unlocking for Reliance Retail as well as Rel Jio where the traction is clearly visible both in terms of the operating profit, the top line etc.

The focus would revolve around what kind of value one can possibly get for these two businesses and as new investors want to come in, Aramco or probably couple of more because the company is also trying to focus on deleveraging the balance sheet. Given the track record of Reliance in the last 10-15 years, they tend to create value out of their existing businesses and get in an investor and it is a win-win for everybody.

Over the next six months to 12 months, that kind of unlocking could happen. Their core business is doing okay. Refining the growth is not that great, petchem is okay but for the other businesses, things are looking extremely good.

How bad could it get for Infosys?
In today’s context, corporate governance and the perception that the market participants have towards any company is far more important than even the underlying performance per se. Given the fact that this kind of allegations have been cast on business practices on the management, that too means that till the time you really get a full clarity on if there is any substance to it or it is just some kind of a noise by disgruntled employees, the market would remain a bit circumspect on what can happen! If you are bidding for a company at a lower margin or if you are a bit aggressive in your cost practices, these would be common practices in this country.

I do not think we can say that this is a lapse of the corporate governance or overall governance framework that Infosys would have. For a large company like Infosys, I doubt if it is possible for a few people to do away with certain governance practices and do certain things which have been put out in this particular letter, But we have to wait and see and what is going to happen is that a large part of the management bandwidth is going to be taken away by the investigation and perception that it may create. So I think there is a case for a bit of a derating for Infosys at least in the short run.

Do you believe that retailers like a Trent or a D-Mart will continue to command such high valuations? For investors, who are still sitting on the sidelines waiting to get into these stocks, is any day a good day?
What the market likes about some of these companies is the fact that on a lower margin of 4% to 6%, some of these companies are able to deliver a very healthy growth both in top line as well as in the operating profit and some of these companies for example D-Mart still is in expansion phase. So the call that probably the market is taking is that there is going to be enough of growth because of the footprint expansion as well as the core growth. Once you have a revival in the consumption space, a combination of that would give you much better growth visibility. So, we have been debating about the PE multiple.

For some of these companies, PE multiple does not matter because when you compare a D-Mart with some of the US-based retail companies and the kind of presence that they have on many parameters, you can make out that D-Mart is far more attractive. So, rather than focussing only on the PE, we should look at overall picture in terms of what is the overall potential of that business, whether execution capability of the management is good enough to take care of the opportunity and the market is willing to pay these premiums to these quality companies.

TVS had a fantastic run in the last couple of sessions. It is making you look at it again, given the kind of trend we have seen on two-wheelers. Otherwise, would you relook at TVS?
It has been difficult for two-wheeler companies in the last two years and particularly this quarterly numbers were not that great in terms of volume growth or EBITDA margins per se. But if we are looking at a revival over the next ix to 12 months, then somewhere two-wheelers also as a space will catch up.

I think both Hero Motors and Bajaj appear to be on a better wicket because of the better presence they have across the rural markets. In terms of preference, we would go with that but overall, in two-wheelers, we should wait for good numbers to take a big call on it.

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