Are you placing bets on any other themes and exports like textile or pharma, anything in the export space that looks good from the traditional sectors?
Chakri Lokapriya: In the traditional sector still the export looks very weak. If you look at chemicals, it is still weak and earnings upgrades at least seem to be at least two quarters away. In the case of IT, a well-known story, the orders are still not translating into revenues. Pharma is a very selective story like Dr. Reddy’s, yes, they made an acquisition, therefore it will add some amount of growth. Textiles is a small space, interesting space, but we have not looked at it much.
What about HPCL and BPCL? Why is the sector not getting re-rated? Everything in the PSU space has just run away and the government has demonstrated that the political compulsions at least in the fuel retailing prices were yesterday’s story. 80% spirit of oil deregulation is followed, yet HPCL and BPCL are still commanding single-digit PE multiples.
Chakri Lokapriya: You are right. If you look at the other PSU sectors whether it is defence or railways, all the contracts that have been coming in are competitive orders, their margins are good, and there is no political pressure or external pressure for them to price those orders at an unprofitable level. Now, that is the risk that HPCL and BPCL have always had in terms of their refined products, which is still a very big chunk of their revenue. With oil back at about $85-90, the whole uncertainty of how the tax structure around oil prices and I think that is unlikely to go away anytime soon for that sector.On Wednesday, the paint stocks were on fire. We saw Asian Paints jump up, Berger was high, Indigo, Kansai, look at any of the names. It is not the time of the year when you anticipate a move, just around monsoons, etc. What should one do about the paint stocks? Is it a fresh buying opportunity in some of them?
Chakri Lokapriya: Paint stocks at best are a trade because they have corrected very significantly because there is a lot of competition. If you rewind two to three years ago, there were only Asian Paints and Berger Paints and a couple of others. Today, look at Nippon, all the new guys who have come in, and they are taking significant market share. They are taking not just market share, but new volumes and they are hurting pricing. Lots of things are going on in the industry. So, those multiples are unlikely to come back. Therefore, paints at best a trading opportunity.
Do you have a view on Yes Bank? That stock has been in focus on account of a lot of news flow. Reports are going around that SBI has got the approval to perhaps check out, the clarification coming in from the bank and now the latest Moody’s reaffirming the ratings and the outlook raised to positive from stable. Do you watch this one or any other mid-private bank?
Chakri Lokapriya: Yes, there have been a lot of upgrades. The book is improving for Yes Bank, but they are still a long way away from achieving stability. So, it is a very risky story for an investor to try and invest in Yes Bank from that perspective because the number of risks in cleaning up its books still exist. I would stay away. In terms of banks, in general, all the private banks are trading at fairly decent multiples. They are not expensive by any stretch of the imagination, but there are no exceptional earnings. No earnings upgrades are going to happen in this quarter. So, I would not push for any private bank either.
There is a Jefferies report this morning that Jio could be an independent public entity very soon. Is there merit in thinking that Reliance in the next two, three, or four years is going to create a lot of value by unlocking their big businesses?
Chakri Lokapriya: You are right because one of the things that have been holding back Reliance lately is some kind of a holding company discount. People would give a sum of parts to Reliance and value it higher. Now, the market has moved to giving it a discount. So, Jio’s listing at about $100, $120 billion will give a major fillip to the other parts of the segments like its new energy business. Now, the retail is a very big chunk, it is probably about 50% of its overall valuation. Now, that also has been given a holding company discount.
So, Jio listing could act as a catalyst for the sum of parts valuation, which there is a lot of value because new energy is hardly being valued in the current sum of parts. So, yes, the answer is there is a significant upside in Reliance.
Pharma is one space that has been also seeing a lot of interest. Any new names that you have identified there? Today, of course, Glenmark Pharma and Life are going to be focused on account that OFS and the sale of stake happening. Any other name you have recently picked?
Chakri Lokapriya: On pharma as a space, we continue to have a very stock-specific approach. So maybe Dr Reddy’s after they have announced the acquisition of the OTC space, looks like they are going to expand their presence in the OTC space. They have the nicotine company that nicotine patch type of company they have acquired. Now, OTC revenues will be a higher margin, and from about 10% of revenue that will become north of maybe 20-25% in about three to four years. So, in expectation of that, there will be some amount of earnings upgrades and the multiples are fairly reasonable. So, yes, maybe Dr Reddy’s.
