In consumer stocks, margin pressure shows signs of easing: Chakri Lokapriya
At this point of time, valuations are less of a concern but demand pickup is vital, says Lokapriya.
While Nifty has touched the 11,000 mark, the level could not be sustained. What do you think is keeping the move at bay?
A couple of things; it is primarily related to fears of tightness of liquidity because of companies, the Zee, DHFL etc. reigniting fears of maybe there will be a liquidity crunch. Outside of that, a couple of announcements are awaited from RBI about whether the market was expecting an extension of the February 12th circular, which the RBI has not spoken about. But that has been largely discounted in the price.
Other than that, global trade tensions are still doing their bit but today. The concerns about a slowdown and liquidity crunch is weighing on the Indian market, but the RBI and the government have done enough to cut rates and also providing stimulus in terms of the announcements made in the budget.
Do you believe that there would be a bit of comfort in the market once we see some more headway with respect to strategic stake sale in Zee? How do you see the overall story panning out there?
I guess it is the same old story of expanding way too fast in some other areas and leveraging up. Today, we are at a point, where a stake sale is very important for the group. On top of that, the regulatory action of putting in pricing controls are coming together at the same point in time. This lowers the profit margins and the cash flow generation for the whole sector. But in the case of Zee, the fall has been very steep. The stake sales is imminent and that will probably kind of help the company a bit, but pricing power for the industry is quite a distance away and I hope regulatory pressure comes off or eases a little bit.
Do you think even that these levels PVR can be bought for the longer term?
PVR, does not have a strong presence in the southern markets. They are making their first acquisition of SPI Cinemas which has a very strong presence in the south and I think it is further looking to strengthen a base which contributes a significant amount of revenue nationally.
Against that backdrop. what is holding the stock backs is clearly the F&B. There has been no resolution yet, it is still in the courts. While it is unlikely that that F&B rule will be implemented, but until there is a resolution, we do not see significant uptick in the stock prices.
Would you say that after the kind of decline that Tata Motors stock price has seen and may be some follow-through, would you venture out and buy the stock at all? Or would you rather go for other beaten down names?
I would still stay on the sidelines as far as Tata Motors is concerned. Yes, it has fallen a lot but the slowdown in China is real; the Brexit concerns will continue to loom for fairly a bit longer period and after Brexit. what does it do to TaMo’s operations, its factories etc, are issues which are unlikely to be resolved soon. I would stay away from Tata Motors even though its valuations are looking attractive at this point in time.
How are you looking at the overall consumption space? The budget gave a big boost. Is there a particular sect within the consumption space that you would be bullish on? , Do you also believe that there is a lot of potential within the space for the year 2019?
What the budget has done is that it has put a few thousand rupees into the hands of a number of people and that means they will end up buying the low-ticket items and not the high-ticket items.
So, consumer staples and low-ticket consumer items like maybe a toaster, a washing machine may get sold. Against that backdrop, you will have companies such as Voltas which has corrected quite a lot. This is as far as the tax break is concerned for the urban lot.
For the rural lot, you will have the Daburs and Maricos. But across this whole sector, whether it is consumer durable or consumer staples, what is constant is that they have all faced margin pressure due to high raw materials cost last quarter. Now they are showing signs of easing. If that print sustains, which is likely to be the case, then you are likely to see a pickup in volume.
I doubt we will see any significant improvement in the margin in the coming quarter too, given the lack of pricing power. Against that backdrop, in certain of midcap consumer staples, valuations have corrected quite a lot. In companies like Voltas, valuations are still at the midpoint of their five-seven year range.
The stark under-performance in the broader markets vis-à-vis the Nifty continues. Even year to date, so far, we have seen the midcap index down 7.25% year to date whereas the Nifty has just about managed to gain about roughly one odd percent. Do you think this is likely to stay put?
Going into this quarter, the results, where we largely expected the margins would be weak, have already panned out. The demand growth has been weaker than expected. Against that backdrop, we continue to see a fair amount of downgrades to earnings as the reporting season progresses. This leads to two things. One, your earnings are likely to be cut down for FY19 and FY20. Nifty is probably at its midpoint of valuation. It is only about handful of stocks within the Nifty which have held the overall Nifty, while on the other hand, metal, real estate companies have actually had negative returns, even banks for that matter.
From that perspective, valuations are at the midpoint. Earnings are likely to see more downgrades. At this point of time, valuations are less of a concern but more of demand pickup is vital.
As we go into next quarter, we need to see evidence where the volumes across sectors, across industries is beginning to pick up or not.
The entire ADAG basket that has had a terrible week and now the fight between Anil Ambani and the lenders has taken a step forward. The board as well is going and they have dragged L&T and Edelweiss to the court. O ne cannot ignore the kind of massive debt burden that some of these ADAG group companies are sitting on. How should investors approach this basket of stocks?
We would advise investors to stay away from these basket of stocks which are highly leveraged and are in various stages of NCLT and the various processes, we would advise investors to stay away completely because these are highly volatile situations which can change very dramatically. And from that perspective clearly it does not pay in trying to trade these highly leveraged names but there will be sufficient opportunity later on as the dust settles. Till then, we would stay away from this basket of highly leveraged names.