Let us start off the discussion with in fact chemicals because not many on the Street are convinced about the prospects of a turnaround for the sector. What are your thoughts?
Over the last two years we have seen everything that could be a headwind for the sector play out. Volumes came down because there was oversupply in the markets. Also, raw material prices went up because there was global inflation. Both of those impacted operating leverage adversely. Margins came down and that impacted also stock prices because in any case they were priced to perfection.
Now we are seeing prices having corrected. Some margin of safety in this space. We are also seeing raw material prices cool off. Inventory in the system has eased off as well. So, we may be if not at the bottom, somewhere close to the bottom as regards demand patterns and also margins.This cannot be anything but good for this sector given that stock prices are also leaving much on the table at this moment. So, if someone is not investing for the next quarter, two quarters and is taking a longer-term view in this space, there may be many opportunities in this space to take advantage of.
What is the view on IndiGo? Last week we had seen that big upgrade come by from Kotak. One part of the Street believe that the best is over and the peak profitability is behind, but clearly the stock price is telling you something else.
I rather than talk about the individual stock, let me give you a broader perspective and then we can all draw conclusions on the stock itself. Clearly, this is a market where you do not have pricing power and so what will differentiate one company from the other is how well you manage costs.
This company in particular is clearly more than a 50% market shareholder in the industry and people go to a company in this space for two reasons, one, they get cheaper prices on their tickets. Second, they reach from place A to place B on time and whoever does that well gets the bulk of the market share.
Given that this company or a few companies in this space have exhibited these strengths, clearly they will gather market share and consistently there will be a shift of market share towards such companies.
We also believe that whoever manages their operations, their entire supply chain well in this space will be able to tide over cycles in this space.
As we all know raw material which is petrol, ATF, that price goes up and down quite frequently in this space and if you manage your supply chain and costs, you will manage your operations very well which only a few companies do in this space.
And also, in context of where India is, we are somewhere close to 400 to 500 aeroplanes. Last I remember versus I think China is about 10,000 or is it the US which is 10,000.
So, we have a huge room to grow in this space. A few companies manage costs well. So, it is quite clear that the opportunity size affords that a few companies will become much bigger than where we are today and one should not again play for the one quarter, two quarters, just buy and sit tight for the long term.
Does this argument also hold for another market leader of telecom sector, Bharti Airtel, because it has become one of those four companies which has hit the market cap of $100 billion, so it is the fourth company of India to do that and that stock is sitting at life-high levels. I know you do not want to talk stock specific, but telecom, Airtel, does it go by the similar theory you talked about IndiGo?
Again, this is a very interesting space. What we are seeing in this space is significant consolidation. When we used to in the 2010s and around that period have about 12-13 players, profitability was quite weak and there was significant consolidation.
Number of players came down to two to three. In fact, till recently, one player was also in the doldrums till they raised money only recently in the last one or two months.
Given this situation and given that there has been price cuts in this space, we used to be at Rs 200 ARPU, that ARPU number came down to as low as 110 over a period of time and from there, we have traversed to about 200 bucks again.
This does not take care of inflation also in this space over this last five- to six-year period since the large player with deep pockets came into this space, which is Jio, in fact.
Given where we are on ARPUs here, there is no room for ARPUs to go down any further and every room for ARPUs to actually move up from here.
And in commodity sectors like this, pricing determines where stock prices go. If prices of making calls and of data go up, clearly that will have a positive impact on stock prices as well.
And since we have only a few listed players of those, even lesser are financially stable, those companies which are financially stable will benefit disproportionately and that will also reflect in their stock prices.
Where is it that you are seeing opportunity to deploy fresh money if at all or would you say just wait it out, the market has hit an all-time peak and so have valuations pretty much across the board?
I have a feeling that at this moment, this is a market which is highly in favour of the individual investor because the individual investor does not have portfolio complications to manage and he can look at a bottom-up opportunities without having liquidity concerns because he is not managing as much money as a professional manager and there are a dime a dozen opportunities where you can pick stocks which are reasonably priced, where the future looks quite bright and investors are really not focusing on these pockets.
Also in our judgment, it is not valuations that prevent downsides, it is really earnings growth which prevents downsides and the situation that the economy finds itself in today, as also the corporate as a result, we feel that there is earnings tailwinds which has not been seen in quite a long period of time and those tailwinds will ensure that downsides will be limited in this market.
With that context, let me tell you that I find a lot of opportunity in manufacturing capital goods, some even in defence. I think that the rural sector is one space which is primed for a takeoff in the next say 6 to 12 months, particularly discretionary plays in the rural space, those will see significant tailwinds because that is a space which has seen no pleasure from the markets over the last two to three years and we think that there is going to be an uptick in that tide coming in the next coming 6 to 12 months. We do also believe that financials are very attractively priced. If you noticed in housing finance itself, there has been 40% growth in recent times. Of course, there is the base effect because of HDFC merger, but aside from that also housing finance is doing exceptionally well.
While credit cards have eased off a little bit, but by and large the banking space continues to do very well. In our judgment, banking and finance looks attractive. So, there are ample opportunities in the market which do not appear expensive.
You could find opportunities in banking space in the 5 to 10 times price to earnings rate. I would not call that expensive by any measure. So, there are reasonable opportunities in the market to take advantage of.
I also wanted your take regarding some of these housing finance companies. There will be some more announcements for the housing projects for rural as well. In view of that would you take a bet on any of the housing finance companies, affordable segments especially?
This is a very interesting space in our judgment. There are certain names in this space which are quite attractively priced, that is also largely because there is either technical reasons for which they are priced low or there are company specific reasons which were temporary and which may go away going forward because of which prices have been impacted adversely.
In certain cases the prices are low because there is PE selling in those names. Private equity holders are selling in those names, that is keeping those stocks at lower levels despite operations showing significant uptake.
Also, if you see the capital adequacy of many of these companies, they have as much as 40% to 45% capital adequacy which suggests that there is substantial room for growth with existing capital.
They do not need to raise incremental capital. In that scenario if these companies have consolidated two-three years, it offers an opportunity in our judgment.
There are also certain companies which were down and out after the IL&FS crisis where there were credibility issues which have raised capital of late and trade at really ridiculous valuation where there may be opportunity going forward.
So, there are tailwinds in the sector. Prices are attractive in many sub-pockets of the sector and we do think that this is an uncertain space where uncertainty should be attractive for the investor because prices are low because of the uncertainty and so we are definitely positive on this space.
