There's immense opportunity for long-term investment in insurance: Yogesh Mehta, Motilal Oswal Securities
We are avoiding metal space, but select auto stocks can be considered, says Mehta.
Are these good levels for Bharti where one could bottom fish or should one completely avoid this stock?
It seems Bharti’s earning cycle which was on a downward spiral, has been stopped for now. Today, Moody’s downgrade has given some disappointment but at around Rs 280-300 level, it is a very limited risk on the investors’ side because the price war is almost on the verge of completion and they have already laid out new strategies.
We believe that the earning cycle will remain flattish for them and will not be in a downward spiral. From investment perspective, the downside seems to be very limited. Unless and until, we see something drastically surprising or shocking due to any external reason, it seems that everything is priced in at this point in time.
We have been tracking all the news on DHFL, RCom stocks. We have seen the kind of collateral damage across group counters there. What it is going to do to the banking space? How big a concern should there be?
Overall, the asset quality has deteriorated for public sector banks over last two years but on private sector banks, nothing seems to be like that and the growth path is still visible. In some banks, it is 20% and in few banks it is 23-24%.
There are some NBFCs with strong parentage and track record. They will be able to raise funds from the market and will be able to successfully pass on the higher cost of funding to the end customers. They will have some better days from here on. But there are also a few companies which would not be able to deliver and face competition. It will be mixed effect for the overall scenario right now in NBFCs.
What is your take in the larger insurance space? What is the kind of potential you see on the broader space going forward?
For insurance companies, the penetration level is really very low in India. So, there is immense opportunity for this company to prosper from here. Average new premium collection is in 18-22% range and it is a healthy ratio. Though price to embedded value is 2.5 times to 3-3.5 times, that is on the stretch side.
On any further correction in insurance companies -- be it in health insurance, personal insurance or any other insurance -- there is immense opportunity for long-term investment with 3-5 years’ perspective. Any correction or moderation into the price to embedded value would be a good opportunity for all these companies like HDFC Life or be it ICICI or SBI Life or PNB. All these companies will have strong future.
Are you advising your clients to go bottom fishing in auto and metal space?
We are avoiding the metal space right now because of too many linkages on the global front. That is the external factor we need to watch out for. So we are not advising bottom fishing in either domestic or import-oriented companies.
But in the auto space, there are many names like Ashok Leyland, Bharat Forge or Motherson Sumi, which have suffered very heavily. The price to earning multiple and the valuations comfort are now significantly higher and in terms of passenger vehicles like Maruti and all, the PE has moderated.
We believe that the December numbers were one of the shockers but January month again at 1,51,000, it is back to the track. It can be sustained further with the new launches lined up in second half of CY19 and then FY20. We believe that at 20 times FY20 PE multiple, Maruti is reasonably priced right now. On 8% to 10% correction, one can gradually pick up these stocks.
It is difficult to take a call on metals. Post the correction, there is still global headwinds and lack of demand pickup at home. Yet Hindalco can be picked up at current levels.
As an investor, do you have the conviction to go out and buy Tata Motors which has been so beaten down?
In last two and a half years, Tata Motors has not given rise to any conviction. But looking at replacement value, it comes at around Rs 140 to Rs 145 per share as a replacement. If anybody buys at this level, there are hardly any downside risks. Maybe waiting period would be uncertain, but the downside risk will be very limited because the entire enterprise value is at around Rs 140 to Rs 145 per share.
Virtually they are at very limited risk. With the new launches, if they get successful responses from the users and clients, then we can see some good ramp-up there. But again JLR performance has suffered due to global growth slowdown. Even if domestic scenario recovers, the international scenario is darkened by impending UK Brexit. Also US and China slowdown is still a hangover. It is better to avoid such investment into the portfolios.
Does it give you conviction as an investor to go out and buy the Tata Motors which has been just so beaten down?
So far in last two and a half years it has never given any conviction but looking at replacement value, the enterprise value, the whole replacement cost comes at around Rs 140 to Rs 145 per share as a replacement. So if anybody buys at this level, there are hardly any downside risk, maybe waiting period would be uncertain but downside risk will be very limited because the entire enterprise value is at around Rs 140 to Rs 145 per share. So virtually they are at very limited risk. And new launches on the domestic front which was due to Nano, it was in a bad shape and deep into the red with the new launches if they get successful responses from the user and the clients, then we can see some good ramp up there but again JLR which is a parent company, the performance since global growth slowdown and all other scary situation may arise, so that point in time we believe that again if domestic scenario will recover but then international scenario on the UK Brexit or that is far away now but US and China slowdown is still a hangover. So would say that better to avoid such investment into the portfolios.
What is your outlook on FMCG?
Consumption valuation is never attractive. Consumption stocks are always 35 and more than 35 times PE multiple. However, the higher ROE and ROCEs are always supporting factors. The volume growth in all these companies like Hindustan Unilever or Dabur over or last four quarters, were always on the higher single digit or early double digit. That gives strong confidence on the growth path.
Second, the recent budget gave sops for farmers, lower middle class and poor classes. The money in hand does not mean they will go buy oil and shampoos and soaps, but at least that will grow the business on the higher side. That will give confidence that growth is picking up and valuations are not at on a discomfort level.
We believe consistent earning growth will be there as we saw in case of Hindustan Unilever and Dabur results in Q3. We believe that trajectory will continue for the consumption story in India.
What is your take on HUL?
HUL is one of our preferred picks in largecap consumption. We believe that the management has adopted three-four key strategies to drive their performances over next one-two-three years and those all are on new product launches, more focus on natural variants and of course, greater penetration in different segments.
That gives strong confidence in HUL post Q3 numbers.