Talking to ET Now, Kunj Bansal , ED & CIO, Centrum Wealth Management , says with end of USFDA over-activism, the whole pharma sector looks like a good investment whereas IT as a sector should be avoided for next 5-6 quarters.
A word on Reliance that has to be the big talking point now, at Rs 1500 just yesterday we saw a new tariff plan from Jio. A lot of analysts were talking about as to how revenue per user is going to increase with this current plan from Reliance Industries. For those who have completely missed the boat in this ride to 1500, is there still opportunity to get in?
Reliance has always been a difficult puzzle to solve. If you look at the stock price movement and if we leave aside the last six months movement, for almost five, six, seven long years, the stock has underperformed and now suddenly we find it at a 9 or a 10 year high without the financials following it.
Of course, in the equity market the expectation is that always the financials will follow and the stock price does move forward in advance and this is what seems to be happening. It is a difficult call despite the price hikes. It is not that it will convert into profitability immediately. It is a long short but probably, The market is betting on not only Reliance, but the whole telecom pack as such with expectation of reducing competition and consolidation. We have in general seen a movement and a buying interest. Let us also keep in mind that the whole sector including Reliance was under-owned. That is where we are seeing the interest.
The market is also looking for opportunities which have not participated yet and that is also the reason for the rise. To link it to financials will be difficult but the momentum is there.
Would you be gung ho about OMCs because crude is declining right now?
Not really. Also, that is one space which has already been performing in the last one and a half years and has sharply outperformed. That is another space which has covered their five-six years of long underperformance. Triggers left there for any further upward movement are very few.
Biocon has been one of those slow movers but also one of the big performers of last year. Now you continue to see positive news flow in this. As such pharma seems to be on its route to recovery too. Your thoughts on how pharma should be looked at?
Pharma is one of those sectors wherein the so called contrarian investing if one has to adopt can conveniently be done and without applying too much mind, can adopt to the current market.
If we extend the argument, there are other sectors also which are available at the lower end of the valuation or prices which includes IT. Telecom has marginally improved, there are public sector banks also. But I am not sure if the same logic of contrarian investing can be applied in all such sectors except in pharmaceuticals.
The pharmaceutical sector is something which has been undergoing quite significant, negative news flows over the last few months both domestic and global. Globally of course USFDA over activism and domestically threats of price control. But these are passing phases. The sector is likely to come out winner out of fall these things and as a result, the whole sector looks like a good investment.
PSU banks at a very interesting juncture right now. Given how committed the government and the RBI seem to be to clean up the NPA mess, in the next two quarters, may be the PSU bank NPA performance is going to continue to be lacklustre or may be even weak and take a hard hit what next for them?
One has to look at public sector banks from two perspectives. One is like the pharmaceutical sector, can one do contrarian investing? The other is something called “junk investing. Public sector banks would still not be exactly junk but would fall in very high risk and very high return investment category because given the way changes have been happening in terms of RBI trying to force multiple things in terms of capital not being available to these banks, the government at the end of the day has been trying to give it but ending up providing probably 10, 15, 20% of their requirement. So, it is a long way off for the public sector banks.
In any case if one applies the fundamental principles of investing, one has to be clear about the historical good financials and expected good financials. Both these things are not there. Valuations are there yes there but valuing a bad company at a cheap valuation is not investing and that is where public sector banks fall. It is a long way for them and only if one wants to really take that really high-risk-high-return call over a longer period of time, should one look at that.
Anything out of the new listed debutants that you like which still make for a good buying point? The valuations are questionable, this run in itself on some of those are questionable, but anything that still brings value?
Before I come to any suggestions or ideas on buy, let us also keep in mind that it has not been a one-way street. There are some stocks which have not. Tejas Network is a recent listing which has not done as well. There are so many others also if we go back in history. While I do not have a ready compliance approval, in some of the IPOs which came earlier from auto ancillaries, if we extend our horizon over the last one year, Precision Camshaft is one IPO which came sometime back and went up post listing. It has now corrected because the growth numbers did not come in which was in line with expectations. But going forward, we should see growth numbers coming in. I do not have the exact numbers ready, valuation quite attractive so not amongst the ones which have got listed in last one or two or three months but if we extend our horizon to about a year, there are some opportunities available.
Is that the exuberance in the market which is kicking in? PSU banks or Reliance people are not finding any names to put money into in this market?
Yes, a few things. Some of the names that you have mentioned are part of the recent RBI’s directives to sort these issues — public sector banks versus these companies. So, it is a high risk investors’ call. If you take that call, once these issues are sorted out, may be the company’s financial would be back in place. That is one way to look at it and may be one of the reasons for the stocks to move up.
Second, with Nifty at close to 10,000 which is a life high, you have to keep looking for an idea which has not participated or which is new and that is where some of the investment buying or may be short term trading buying is moving into. In one or two specific cases there have been some fundamental development . While we do not track GMR very aggressively, but recently on Delhi Airport the charges have been reduced significantly which is likely to give a good boost to their business. These are the three reasons why we are seeing that kind of interest in these stocks.
Should IT be something that one can completely avoid in this market?
Yes. The numbers are not expected to be great. It is not that it is going to be a surprise and which of course has been reflecting in the sectors’ underperformance for one and a half years. If we extend the discussion further, does one have a view that in the visible future things will start improving? As of now it does not look likely for one-one and a half year or next four-five quarters. So, one can easily give a pass to almost the whole sector for now.
Let us talk about some of the investment bets. You have been bullish on , La Opala. What continues to give you conviction on this name?
Let us straight away move to some numbers. It is one of the very few companies which reported a 40% top line growth in March quarter and similar in the earlier quarters as well. On one hand, we are saying valuations are expensive, the earnings growth is not there. For last almost three-four years, Indian markets is giving 4-5% kind of earnings growth. Here is a company which is giving you that kind of top line growth. GST for the consumer goods sector as a whole as well as consumer durables will be a disruptor in the short term, may be in June and September quarters. December quarter will be a festival quarter typically for India. The company has return on equity closer to 30%, margins 30% plus valuation. One can still keep arguing it used to be 40-45 kind of PE ratio has come down to 30 PE ratio, is 30 cheap? one can take a call but I think that these are the reasons that we feel that at some point of time these stocks have to give you returns.
If a stock which has a market cap of Rs 20000 crore, trades more than Reliance Industries on the National Stock Exchange, is it time to get worried?
Coming back to AU Finance, we have seen over the years, market leaders changing. Who knows it could be time and I am not predicting it in the immediate future but time for RIL and Infosys and TCS to move down from the leader table and give space to other such players like D-Mart which is at Rs 60,000 crore market cap.
Let us keep in mind. It is not a small number and AU Finance itself as you said Rs 20000 crore of course on a historical basis and in fact that is what lot of times I have asked the question that I have been in the Indian market for 25 years. I do not know long or short what is the obstacle that you face. I said the only obstacle I face is that I am not able to reset my valuation expectations in line with what market has started to trade and that is where the challenge is.