Sanjeev Zarbade of Kotak Securities prefers ITC over HUL, here’s why
“We are monitoring how NBFC sector copes with liquidity crunch in the system.”
What are you telling clients about NBFCs?
We do not have a very active coverage on NBFCs but what we have seen over the last few months is that we were getting concerned with the valuations of the NBFC stocks and in recent times there has been cases like IL&FS which has really led to a crisis of confidence among the entire NBFC sector.
There are sources of funds like banks and mutual funds. I am seeing a lot of scepticism among the lenders to lend to the NBFC sector. It is a matter of time how things evolve but strong NBFCs should be able to ride out because they continue to drive the credit growth. That is what we have seen in the past. Something like Bajaj Finance, which serves the consumer durables sector, would definitely come out stronger, but otherwise we are really in a wait-and-watch mode. How the NBFC sector copes with the liquidity crunch in the system is something that we are still monitoring.
What are you making of Reliance? The numbers were not optically disappointing. Only the GRMs were a mess. Is it a case of profit taking considering like in case of TCS?
Yes, it could be partly that. The results were broadly good but there was pressure on the petrochemical margins as well as on the refining margins. Also on the balance sheet, we have seen that the capital engagement as well as overall capex as well as CWIP continued to remain at elevated levels and has actually entrenched.
In addition to this, given that the valuations are also at 15 times FY20 earnings, we do not see much of an upside from these levels. The investors are looking at booking profits wherever they have and especially in some of the largecaps and liquid names.
What do you make of some of the midcap IT names? MindTree got thrashed irrespective of the management saying that in the latter part of the year growth would actually pick up. This one is almost headed into a case of derating?
The IT sector has performed quite well in last six to eight months and rupee has proved to be the tailwind for the sector. Even the demand environment is looking good and companies like MindTree are growing their digital offerings. However, for some of the companies, we need to consider the risks involved and in case of MindTree, definitely there is a client concentration risk. One client has made oversized contribution to the revenues. So, these are some of the aspects that also one needs to take into consideration while looking at the company. I think that is why there has been negative reaction to the stock price in today’s markets.
What is your in-house call? Are you a buyer in dips in cement space -- be it largecap or midcap?
In second quarter, the overall cement demand was pretty strong and the overall volume growth for the quarter was in double digits. However, the concern with the cement stocks is that their costs have continued to spiral up, especially the fuel costs as well as other transportation costs have gone up. In addition to that, coal as well as petcoke costs have gone up and some of the cement companies have not been able to pass this cost to the consumers and also region wise, we have not seen any meaningful price increases in cement prices.
In cement, we would be really watching out for the margins and how various cement companies are coping with their cost pressures. That is what ACC and UltraTech results will also reflect. You did indicate that the impact of NBFCs’ liquidity tightening could actually trickle down to the real sector that is the infrastructure sector. That is something which we are also monitoring and we are also making the needed adjustments to our target price as well as earnings to take into account this effect.
What is your view on aviation because Jet Airways is firing up the sector? Do you think the liquidity requirements of aviation companies can be met and one could be a contrarian buyer there?
We need to work out to what extent the company would really require funds and at what price the funds will actually come in. These are early days and we need to take a call on the crude prices and how the rupee is moving as almost 60% to 70% of the companies’ costs are related to crude and rupee.
These are the factors that need to be considered and once we have a better handle on these, then only one can really recommend. The other thing is that aviation stocks traditionally have not been value creators. Som we would really not rush in to recommend aviation stocks in a hurry, they do not have a very good track record.
Do you have valuation comforts when it comes to FMCG majors like Hindustan Unilever and ITC?
You rightly said that we do see a lot of earnings resilience as well as stock price stability in consumer names. However, valuations are on the higher side. Historically, stocks like HUL are trading at very steep valuations, almost 45 times forward earnings.
We believe that stocks like HUL may not correct sharply. There could be some time correction in them but so far as ITC is concerned, the stock has underperformed last one, one and a half years and here the valuations are somewhat reasonable at around 23-24 times. Also, there is a steep discount to the other consumer names. At this point, we would prefer ITC over HUL.