No need to rush to auto ancillary stocks right now: Gurmeet Chadha, Complete Circle Consultants
“Bajaj Finance along with HDFC Bank, fall into the buy and forget category.”
What is the market expecting on the exit poll outcome?
It is a difficult call, but if you track the informal betting markets, the indication is that there possibly could be a repeat of the incumbent government with lesser number of seats. We will have to wait. It is too difficult and too close a call. There are a lot of fake polls going around. What has also helped the cause is some very good set of earnings which came yesterday starting with Bajaj Finance and Finserv. Bajaj Auto and Dr Reddy’s are two stocks which have bucked the trend.
Other than the event risk, there are some more things which the market needs to climb the wall of worry; one is the credit squeeze in the market, the debt market is virtually shut for below AAA grade issuers. Even AAA issuers are finding it hard to raise money. We saw Bajaj Electricals cancelling their bond purchase just a few days back and RECs of the world borrowing money at 830-840. So, there are credit and liquidity issues. There is a visible slowdown in few pockets and this trade war thing could lead to some currency depreciation in Yuan as well. There are a few walls to climb right now but anything positive is always welcome, especially during the weekend.
What about some of these tyre stocks. We have had a mixed bag in terms of earnings. Would you stay away altogether because of the kind of conditions right now?
I would wait for maybe a couple of months because the verdict is still out whether it is a cyclical or a systematic or a structural slowdown. I have been speaking to a lot of large auto dealers especially in the northern part. One of my large clients happens to be the dealer for the entire north. His reasons were that there are multiple factors at play including finance cost, mobility apps, less cash in the billing and also the fact that cost has gone up. The sense is that two-wheelers will see some recovery to begin with and that is the pocket one needs to be focussed on right now. Then probably, the four-wheelers and others will come into play.
Bajaj Auto is not only gaining market share, their domestic sales are also growing 25-30%, the export numbers are up 22%. The promoters have been increasing stake from about 49% to almost 51-52% by the end of the March quarter. There are a lot of new launches they have done. They just have the ideal product mix.
If you see they have a Pulsar, RS 400, there is the Avenger 400 model. They also came up with a 125 cc variant in Pulsar at the lower end. So it is doing all the right things. Obviously, it is coming at the cost of margins which have come down to 16% but my sense is they will also stabilise. You can start with two-wheelers.
I would be a little wary on tyre stocks. I would possibly look at some more names in the auto ancillary space. Tyres have two components; one is the replacement market, one is the primary market. And then the proportion of raw material cost to the overall margin is very high. If you compare this with some of the other auto ancillary names like a Minda and Motherson Sumi, after a heavy correction, those look to be a better play. But be patient, there is no rush to try and accumulate them right now.
How you are reading into Bajaj Finance numbers?
We have discussed Bajaj Finance so many times and I always say this is a consumption stock. This is a retail credit consumption story. What I was most impressed with was the management commentary, other than the numbers which are obviously spectacular in a tough environment. They spoke about continuity, about how they want to expand the balance sheet by 25% to 27% and how they want to grow the net interest income by 23% to 25%.
AUM is up 41% which to me is staggering. What I was most impressed was that the cost of funds only went up by 10 to 15 bps. Compared this with some of the other NBFC names. I have been saying that it is your liability side which will determine your performance on the asset side. If you have to look at the companies, you should look at their liability side now.
Their commentary on their mortgage business was very very encouraging. The opportunity is huge with the kind of impact we have seen with other players slowing down but because it is a new subsidiary. They would again like to grow the liability side more. The confidence they expressed by maintaining return on assets at about 3.3 to 3.4% and ROEs of 18-20% makes it a long-term buy.
This is one stock which along with HDFC Bank, falls into the buy and forget category. Just keep accumulating and whenever you see any dips for whatsoever reasons, you should try and pounce on it and buy a little more.