Jan 18, 2012, 02.39 PM IST
Commenting on the index heavyweight’s buyback plans, Sanju Verma, managing director and chief executive officer of Violet Arch Capital Advisors says that the announcement will not impact the company’s numbers materially. Verma feels that Reliance will deliver an EPS of Rs 67-68 in FY12.
Reliance Industries will consider a buyback of shares on January 20 when the company reports third quarter numbers. Commenting on the index heavyweight’s buyback plans, Sanju Verma, MD & CEO of Violet Arch Capital Advisors says that the announcement will not impact the company’s numbers materially . Verma feels that Reliance will deliver an EPS of Rs 67-68 in FY12.
Giving her views on the recent Essar Oil episode, Verma feels that if the Supreme Court has to be fair and if it has asked Essar Oil to pay Rs 6,000 crore as fine then by that logic, the likes of SAIL need to be incentivised because it is purely government laxity which has led to a huge opportunity loss.
Commenting on IT major TCS ’ Q3 results, Verma points out that for the first time in six quarters the sequential revenue growth of TCS has been lower than that of Infosys by 100 bps. The sequential revenue growth in dollar terms for Infosys stands at 3.4% and for TCS at just about 2.4%. Therefore, she feels that TCS may not be able to replicate its stellar performance going forward.
Verma vouches for stocks like L&T and BHEL because after all the policy paralysis, if a company is still likely to show 15-16% growth in earnings on year on year basis going forward, it can only get better. However, she feels that the earnings will not surprise but on the order book guidance front, which the company gave to the tune of 5% last quarter will be a bit of a nasty surprise for investors. From the IT space, HCL Tech remains her best bet.
Below is the edited transcript of Verma's interview with Udayan Mukherjee and Mitali Mukherjee of CNBC-TV18. Also watch the accompanying video.
Q: What do you make of the Reliance buyback? Details will come on Friday but how do you think the market should read it?
A: Reliance is virtually a debt free company with the debt to equity at around 0.6 times and cash equivalent reserve pile a little lesser than Rs 70,000 crore. I think the buyback announcement will not materially impact numbers; that said the timing is certainly very interesting. I am sure the management has a whiff of the fact that going forward FY12-FY13 the earnings growth is likely to be very pedestrian. I think in FY11, EPS for Reliance was around Rs 62. In FY12, it should be around Rs 67 to Rs 68 and I will be positively surprised if they manage to do around Rs 72 odd in FY13.
So from an earning trajectory perspective, there is nothing much to look forward to but Reliance being Reliance, you have to give them credit for the fact that they are masters when it comes to financial accounting. I think what was very smart on their part post the BP deal was that they reduced the book value of their fixed assets by around Rs 33,000 crore by routing the BP deal through the balance sheet and not the profit and loss account.
Q: What are your thoughts on the entire Essar Oil episode and what kind of downside pressure could the stock see?
A: I particularly find this judicial intervention interesting given that it is likely to lead to an outflow of something in excess of Rs 6,000 crore for Essar Oil. But at the end of the day what certainly is not palatable is the fact that a large part of the delay in kick-starting and commencing the refinery at Vadinar in Gujarat on the part of Essar Oil has had to do with natural calamities, delay in clearances.
So to that extent, the demand for tax incentives or treating the tax outgo as deferred tax, I think is not totally unjustified. While on the one hand, the judicial intervention certainly could be a precursor of things to come, it sets the cat among the pigeons.
Let’s not forget that the SAIL-Posco joint venture which was a USD 12-13 billion project has been hanging on fire for so long. If Supreme Court has to be fair and if it has asked Essar Oil to pay Rs 6,000 crore as fine then by that logic, the lights of SAIL need to be incentivised because it is purely government laxity which has led to a huge opportunity loss because every six million tonne that SAIL adds in terms of capacities could add something like Rs 24,000 to Rs 25,000 crore to revenues in a single year assuming that a million tonne is sold at something like Rs 38,000 to Rs 39,000 a tonne. So the point I am trying to make is that if you have to be fair, then it should be across the board, you cannot pick and choose.
Q: What do you do with TCS now post the results reactions. It is down 3% today, would you buy it at Rs 1070?
A: So much has been written about TCS having edged out Reliance on more than one occasion in the last couple of weeks with respect to market capitalisation; both are close to USD 60 billion odd. Very interesting things which not many people have observed last year is that for the first time after five to six years, Accenture edged pass Infosys with respect to market cap, between 2005 and 2010 Infosys had a market cap higher than Accenture but last year in May, Accenture took the cake.
The reason why I am talking of Infosys and Accenture here is that going forward, I think it is not going to be the currency bit which will drive tech stocks. Given that currency was a big swing factor last year, it is not going to be the body language of the top managements or posturing or guidance. I think it will be pure and simple back to basics.
Infosys, on a standalone basis, has declared a stellar set of numbers but the way it lost out in terms of market cap to Accenture tells you a very interesting story. Increasingly, investors will have to take a call, do we want to buy a stock which has predictability with respect to the revenue and earnings profile which is plain and simple solution outsourcing model where the management fiercely protects margins, does not matter if topline is compromised. Infosys reminds me of IBM; the growth in revenues is pedestrian 3-4% every quarter but look at it as a USD 300 billion market cap company with close to 20% margin. I think if Infosys is trying to model itself on those lines then on the other hand, you have TCS, for the market cap game.
If you are looking for a bit of an alpha and beta in your portfolio which is what investors are looking at then TCS is a stock to pick and put your money on. I think that was the reason that TCS outperformed the tech sector and the broader indices by a huge margin last year. Don’t forget that Infosys lost one fifth of its value in calendar year 2011 whereas TCS barely budged, it was down by 0.5% in the year when the index lost more than 25% in rupee terms and 37% in dollar terms. But now, the past cannot be used as a precedent to indicate how the future will pan out.
Don’t forget that TCS still has outstanding hedges of close to USD 1.4 billion locked in at Rs 49. Of course, those hedges will close out in the next two-three quarters and it will enter FY13 with a far lighter hedge book. That said, for the first time in six quarters the sequential revenue growth of TCS has been lower than that of Infosys by full 100 bps. The sequential revenue growth in dollar terms for Infosys stands at 3.4% and for TCS at just about 2.4%.
So my worry is that going forward TCS may not be able to replicate its stellar performance. That said, the pecking order as I see would perhaps be HCL Tech, TCS followed by Infosys. The reason why I put TCS in the middle of the pecking order is simply because it is too big now to be ignored and the most interesting bit of the result is discretionary spending as a percentage of incremental revenues stands at 24%. So that is reassuring that the discretionary spend has been holding rock steady in a year when IT budgets have been very choppy.
Q: What are your views on L&T and would you would buy it after 30% rally the stock has seen?
A: Earlier, I stuck my neck out for both L&T and BHEL, bucking the otherwise adverse trend, my simple layman logic being that if after all the policy paralysis, you have a company which is still likely to show 15-16% growth in earnings on year on year basis going forward, it can only get better. Now I think the earnings will not surprise but the order book guidance which they gave to the tune of 5% last quarter, there will be a bit of a nasty surprise for investors.
I will be surprised if they even manage to do 2% with respect to incremental order intake, that number could actually be in the negative territory because in the next 2-2.5 months before FY12 closes, L&T has to have an incremental order intake of around Rs 34,000-35,000 crore to be able to report a 5% growth year on year in the order book and I don’t see that happening.
That said, sequentially L&T’s performance will be superior to BHEL, both these companies will report 15-17% jump year on year in net sale so there are no surprises there. But L&T’s sequential jump in profits will be in excess of 20% whereas in the case of BHEL, the base effect will ensure that the numbers are slightly more muted at 15-16% sequential jump at the bottomline level.
Going forward, the likes of L&T could see huge traction because if interest rates come down, then interest cost as a percentage of sales is likely two quarters down the line to come down by about 400-500 bps. If indeed that happens, then things could suddenly take a huge uptick for the capital goods space particularly for biggies like L&T and BHEL and that’s the reason that I have been slightly contrarian and have stuck my neck out and said that these two stocks are worth taking a hard look at.
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