The Idea-Vodafone merger is a good thing for the industry over a longer-term but negative in the short-term because it will aggravate competition in the space and add pressure on margins, believes G Chokkalingam, Founder & Managing Director, Equinomics Research & Advisory.
So, he recommends a sell on both Idea and Bharti Airtel.
Sharing his views on the other stocks, he is upbeat on JB Chemicals on back of strong fundamentals and expects a 20-22 percent returns from current levels too.
Prashant: A quick word on if you have had the chance to look at the deal valuations etc., for Idea Cellular
A: It is a good thing to happen for the long-term, but in the short-term I continue to remain a little negative on entire telecom pack because the merger is going to aggravate the competition in the space. So, I do believe that the margin will keep coming down, at least for the next two years. Therefore, I would use this opportunity to sell both Idea and Bharti Airtel.
Ekta: Let us move away from telecom now because you have a lot of other picks that you are recommending today. Let us start with JB Chemicals and Pharmaceuticals. I was reading that you think that uncertainties related to US pharmaceutical policies, JB Chemicals would be one of the least impacted. Why is that?
A: Certainly, because their exposure to the US market is least as compared to other pharmaceutical companies. In my estimate it is less than 20 percent. It is a very well diversified export basket and also on domestic market they have been growing pretty well.
The stock has come down in the last two months because in December results they posted a degrowth of around 24 percent year-on-year, but if you look at the notes carefully, the management itself mentioned that it is mainly on account of a lot of expenditures which are long-term in nature and investment in nature. They have been accounted for in the December quarter results and that is the reason the profits have come down, otherwise, the fundamentals have remained intact. It is a cash-rich company. The company has nearly Rs 400 crore of free cash and in terms of valuations, on one-year forward earnings, it is trading at just around 12-13 price-earnings ratio (P/E). Therefore, I firmly believe that the stock can give 20-25 percent return from this level.
Prashant: What else is on your list today? What other stock?
A: Vindhya Telelinks - I am a bit surprised the way the stock is quoting because on core business it is available at around 11-12 P/E, but interestingly Vindhya Telelinks has got investments in Birla Corporation, the cement company. The valuation of the Birla Corporation shares held by Vindhya Telelinks is merely two times the marketcap of Vindhya Telelinks. Even if you take into account the debt of Vindhya Telelinks and consider enterprise value, still it is phenomenal discount to the enterprise value, the value of investments in Birla Corporation.
Apart from that, the company has got into engineering, procurement, production (EPC) projects in telecom. In the last three years, that segment has almost tripled the business. And third, the government push on Digital India is also positive because this is one of the major producers of optic fibre and the opportunity for optic fibre space in Digital India scenario looks very promising. So, considering all these facts, Vindhya Telelinks is a great value pick.
Ekta: Tell us about Bombay Burmah Trading Corporation?
A: We are recommending Bombay Burmah strongly because even after the rise, it is still trading at around 72 percent discount to value of investments it holds in Britannia Industries. Most holding companies are trading at around average 50 percent discount. Some holding companies have only 30 percent discount whereas this company still has 72 percent discount and Britannia continues to grow and Britannia is a fast-moving consumer goods (FMCG) company.
However, most other holding companies have got a valuation coming from the group companies which are engaged in diversified commodity business. Unlike that, this company has major investments in FMCG business which is consistently growing. I believe that even if you assume 60 percent discount, the stock is worth more than Rs 1,100. So, therefore, I strongly recommend Bombay Burmah for retail investors.
Prashant: One quick point. Going back to Vindhya, do you like the underlying business itself apart from its stake in Birla Corporation etc. which you said that it is worth 2x the current marketcap of the company. Do you like Vindhya's business, do they pay a dividend? Give us some details.A: I would not have recommended if the company continued only with copper cables. As I mentioned earlier, the company has diversified into optic fibre and not only that, it has got diversified into EPC projects for telecom and it has tripled within three years. So, these two segments give a lot of potential. It is a good dividend paying company, balance sheet comfort is also there and the debt is very low compared to many other companies which provide cable to the telecom sector. Therefore, I firmly believe that it is cheaply undervalued.