Mar 21, 2017 02:50 PM IST | Source: CNBC-TV18

Stay away from telecom; like Aurobindo, Bharat Financial: Varanium Capital Advisors

The US business for Aurobindo Pharma will do extremely well and the Europe acquisition will help it expand margins, says TS Anantakrishnan, CEO, Varanium Capital Advisors.

In an interview to CNBC-TV18, TS Anantakrishnan, CEO, Varanium Capital Advisors shared his rationale for picking Bharat Financial Inclusion from the microfinance/NBFC space and Aurobindo Pharma from the pharma pack.

However, he is not very upbeat on the Idea-Vodafone merger and says the synergies may not come about easily for them and so would prefer to stay away from the telecom pack. The completion of merger will also take a lot of time, believes Anantakrishnan.

He expects Idea Cellular to trade in rage of Rs 80-85.

With regards to Aurobindo Pharma, he says the US business for the company will do extremely well and the Europe acquisition will help them expand margins. Valuations too are cheap, he adds.

Below is the verbatim transcript of TS Anantakrishnan’s interview to Prashant Nair & Ekta Batra on CNBC-TV18.

Prashant: Before I get your thoughts on the market let us talk about a couple of stocks that you like. One is Bharat Financial Inclusion, just tell us the story because there is this apparently deal which is impending and imminent as well?

A: As far as the deal is concerned, we are not really sure what the real deal will be. I think from an efficiency perspective post demonetisation we have started to see efficiency going back and our initial conversations with the management seem to indicate that it is a blip which had happened in the last three months post demonetisation. They believe that much of that delay in payments would start to come through because now the UP elections are also over, Maharashtra elections are also over. So, we believe that it is one of the better stories in the microfinance place at this point given the net interest margins (NIM) that we are seeing and obviously given the way the management has looked at the credit growth aspects of it, they have been growing at a clip of 27-28 percent, so I think this has been one of our better picks in the NBFC space.

Ekta: The other big story that is making headlines is obviously Idea Cellular. Now the concern is that the synergies are probably going to only culminate four years down the line and by then industry dynamics could be completely different. In fact they have been turned over their head in the span of 12-18 months itself. You sense?

A: I would tend to agree because the whole story in terms of synergies with both Idea and Vodafone coming in both around sub 30 percent EBITDA margin and them expanding to the level of say Bharti Airtel which is around 40 percent EBITDA margin that presumes the integration going on smoothly, that presumes that the telecom sector per se given the pricing pressures that Jio is putting on everybody else has become stable. So, I believe that synergies that everybody is estimating is not going to come on that easily.

EBITDA margins may in fact, come off from the 29 percent that you see may come down as the integration cost escalate and so that is probably the reason why you are also seeing Idea valuation which was at Rs 120 coming off. So, we don’t see any opportunities, especially in the telecom space at least till some clarity emerges as far as pricing is concerned as far as the dynamics within the telecom industry start to change.

Prashant: For Idea specifically, it is one of the weaker players with Vodafone may be it becomes a larger-bigger player but because you can trade Idea as Idea right now do you see meaningful downside from here? The merger will take a lot of time to complete?

A: If it happens in 12 months I think it will be a task which was well done. We think it is going to take much longer for the merger to complete, for the integration to complete. When the news of this particular merger was talked about Idea was around Rs 70-75 it moved up to Rs 120 I think it will still range between Rs 80-85. I don’t see any specific movement for it to go up. I think it will be more specific, in the sense that it has come down from Rs 120 to Rs 90, so when I am talking about the range being Rs 80-85 automatically it means it is going to come down.

Prashant: Kumar Mangalam Birla yesterday said was Rs 72 was the price, everything else was, they called it artificial because of the deal announced and the frenzy which followed etc.

A: It is just like some of the parts being more than the whole itself and therefore that was the assumption the market was making. But we don’t really, at least my belief is that it is not going to be a simple task in terms of integration.

Prashant: Other name which you liked for a while is Aurobindo Pharma and you still stay bullish. It has done well very recently?

A: We have been holding it for several years, now I think as far as the valuations are concerned it is one of the cheapest pharma stocks at 14 times multiple. They have the largest number of ANDA filings closed to 190. So, I think from a prospect perspective we see EBITDA margins expanding going north of 25 percent and if you look at the next three years, we see the growth rates at 25 percent in north. So, from that perspective, we see US doing extremely well for them. We think their acquisition in Europe has started to turn around, so that should start to expand the margins further.

Prashant: Bharat Financial and Aurobindo Pharma in terms of individual stocks would trigger right at the top?

A: Those are some of our top bets at this point.
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