Sep 06, 2011, 10.51 PM | Source: CNBC-TV18
Phani Sekhar, fund manager at Angel Broking gives his views on Reliance Infra, Hero MotoCorp and the IT sector.
In the auto segment, Sekhar is positive about two wheelers which is slowly being favoured by investors. “I think we will see another 5-6% rally in this sector because we are at the beginning of the festive season. Therefore, I don’t see any problem with sales or margins atleast till November” he added.
Coming to the troubled IT sector, Sekhar believes that it is a good time to enter this secotr now, but only the large caps. “Large IT companies have atleast a 3-5% operating margin cushion in the form of discretionary bonuses that they pay to their employees” he said. Therefore, he believes that large cap IT companies will more or less hold steady and this price correction is a good opportunity to enter any of the four large IT companies.
Below is an edited transcript of his interview with Latha Venkatesh and Sonia Shenoy. Also watch the accompanying video.
Q: What do you see on the charts of Reliance Infra?
A: This is one of the cheapest large cap infrastructure stocks available. One of the reasons that it is being battered continuously apart from the problems associated with the group is that Reliance Infra derives 70% of its value from long gestation assets. So you have around 45% of Reliance Infra’s value coming from Reliance Power, whose operations will at best begin in another two years. Another 25% of its value comes from infrastructure SPVs, again which will starts operations in not less than another 1.5 year. So effectively you are just looking at around 30% of the company which is delivering operating results as of this point. So that is the reason why on return ratios and on all parameters it is not able to match up to the expectations of the investors.
You have actually seen stocks with long gestation projects, like GMR or GVK , heavily underperform in the last two years because investors are not willing to bet their money on such long term projects at this point in time for reasons that we all know. I think investors need to be little bit more patient in Reliance Infra because at 0.5 times price to book, that too on FY11, I don’t think any stock can get more cheaper.
Q: Even if he holds on for a year, will his acquisition price come back at all?
A: The way to look at this is not whether Rs 666 will come back. As and when sentiments in the market improve and infrastructure as a sector starts gaining momentum, you are likely to see this stock go up by three times. It is difficult to say if this will happen in the next one year or three years, but I am reasonably sure that over the next three years you are likely to see this stock in three figures. So if the investor approaches his stock with that horizon, he will make handsome gains.
Q: What is your call on Hero Motocorp ?
A: I think the investor should book profits during another 5-6% rally. Of late, we have actually seen that two wheelers have started gaining the favour of investors. Earlier people believed that they are all interest rate sensitives, but with the kind of sales numbers that these companies have started throwing month after month, I think they are more in realm of consumer discretionary or consumer durables. So I think we all understand why investors like this
The next three months are again going to be very good for this industry because you are at the beginning of the festive season. Therefore, I don’t see any problem with sales or margins atleast till November. With that in mind, you can actually see another 5-6% rally.
But, valuations are really stretched for most of these companies. So I would advice the investor to book his profits around Rs 2250-2300 levels, but re-enter around Rs 1900 to Rs 2000 because over the next one year time frame, we can look at a 20% return from Rs 1900 levels. So probably from a one year time frame, he can look at a target of Rs 2450 or Rs 2500.
Q: After the correction that IT has seen, is it a good time to buy at all? Or should one wait given the global turmoil?
A: Broadly, all IT stocks have corrected. You are actually seeing that although global slowdown is a certainty, the talk of this recession did not come out of the blue. So a lot of this is already anticipated in the decision making that is a bit slow. To that extent, I would believe that a lot is there in the price already. So unlike 2008 I don’t see any nasty surprises.
Having said that, a very important point that investors should consider is that large IT companies have atleast a 3-5% operating margin cushion in the form of discretionary bonuses that they pay to their employees. I think we have already started seeing reports that these bonuses have started getting rationalized at large IT companies.
At the beginning of this year, you had a 20% volume growth kind of expectation in rupee terms. But I think that would get paired down to anywhere between 12-14%. If that happens, I am sure that there won’t be much damage to margins because of these variable bonuses which companies have started cutting. So I think that large cap IT companies would more or less hold steady and this price correction is a good opportunity to enter any of these four large IT companies.