DII flows to keep market stable going forward: Mahantesh Sabarad, SBICAP Securities
- This is the best time to buy OMC stocks.
- With govt boost to housing sector, cement should do well in the months ahead.
- We would focus on small-ticket consumption items.
How do you think the market has got off this week in the backdrop of developments in crude oil prices?
Last week, the market was quite good in terms of the rise that we saw. I would guess we have seen the bottom of the market but the drone attack on Saudi oil plants has seen crude oil prices jumping almost 10%. That is a bit of a worry. Any jump in crude prices on a sustainable basis is conducive for risk-on trade and that means that India as an emerging markets can potentially attract more flows. But here there are possible disruptions ahead in terms of supplies and that point to the exact opposite of what I just said. Now, we would have a typically risk-off trade with a rush towards safe haven.
If that is the case, then the markets will probably see FII outflows but the good news is that we still have strong DII flows. Despite the large FII outflows in the past couple of months, the DII inflows have been such that the markets have tended to stabilise and not go down further. That would be the case for the month ahead as well.
BPCL management said they believed that there will be an actual threat to India only if crude oil prices sustained beyond $70 to $80 a barrel on a prolonged basis. As of now they do not see such a situation. What is your take on the oil marketing PSUs?
The basic business of oil marketing companies and refineries is to convert oil, irrespective of what the price of oil is. They get their conversion margin in the form of refining margin plus the marketing margins as well. The good news for most of the OMCs is that while the refining margin is subject to global events and refining capacity, the marketing margin remains positive sustainably. Given that we have moved away from administered price mechanism. the marketing margins can be left protected by the marketing companies for pricing actions. I do not see any surge in crude oil prices affecting any of the OMCs.
The other development that we are looking at is if there is going to be an M&A activity within the OMC space. The government has already talked of strategic divestment in BPCL. We do not know what the exact plans are, but it does tell us that the heightened M&A activity is something the markets are ignoring right now. Heightened M&A activities typically lead to higher valuation multiples and certain premium over past historical valuations. I would reckon, this would be the best time to buy OMC stocks.
The other concern in the market with regards to what has happened with Saudi Aramco pertains to the deal with Reliance Industries. Market is worried that deal will get delayed or not. That deal will help Reliance to sizably downsize the debt on their books. Is that a valid concern?
No, I do not think that is a valid concern because the deal is not dependent on Aramco’s supplies of crude. The deal is a financial deal, financial transaction with the strategic intent and from a financial perspective, Aramco has financial resources and strength to take this deal forward. I guess the current disruption in oil and the attack on the Saudi’s refinery or refining facilities is not going to hurt this particular deal.
We are heading into the festive season. What is your view on some of those consumption plays?
On the consumption side, we have admittedly seen a slowdown. But the difference is stark between the high ticket consumption items and the low ticket consumption items. The high-ticket consumption items buckets, where you typically have automobile sales, for example is suffering because the general confidence level was going down. But in the small- ticket side, there is sufficient growth. The small-ticket size growth also is being aided by good monsoon progress that we have seen so far across the country. Interest rates are coming down and we also see that from the government side there has been a lot of expenditure boost that is being given. For example, the PM Kisan Yojana’s instalments are yet to be paid out. These factors will influence the small-ticket consumption items. In an environment, where macro conditions show that GDP has been slowing down, the small-ticket consumption items are the ones we would focus on. We would be very sort of positive on that particular sector.
What about some of those consumption plays in automing back, specifically Maruti?
The stated position even in the past was that the fall in the automobile stock prices has been overdone in relation to the volume growth fall that we have seen and therefore we think that somewhere the automobile companies are appearing to be coming into the value kind of zone. Low valuations, attractive high growth ahead because a low base is getting formed and most of these auto companies have characteristically good balance sheets. They have cash-rich balance sheets, high ROCs that they are able to generate. The general tendency is that even in an environment of low growth, their ability to pass on price increases. Our stated position right now is that the automobile sector as a whole is getting attractive. You have to be careful about which stocks you pick. We would look at only those companies which are predominant domestic plays and not necessarily export or global plays.
How are you looking at the cement counters?
Cement is an attractive sector. Last year, it was characterised by high volume growth. The volume growth has decelerated, understandably so, because of the base effect but there is continuing growth in terms of volumes. We have not seen great price erosion. Typically, monsoon is the time when there is price erosion that happens sequentially from the summer months to the monsoon months. But that erosion this time around does not seem to be quite as stark as it used to be in the past.
That tells us that there is enough pricing strength available with most of the cement companies. The good feature of many of the cement companies is that unlike in the past, they are not burdened with great deals of debt and many of them are either cash rich or have sustainably low levels of debt. Cement would continue to remain attractive, given the prospects of good growth on the housing side. With the government giving incremental boost to the housing sector, cement should do well in the months ahead.