Not convinced with valuation of retail names: Rada Advisors

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Not convinced with valuation of retail names: Rada Advisors

Nitin Raheja, chief investment officer at Rada Advisors tells CNBC-TV18 that he is not completely convinced with the valuations at which some of the retail stocks trade at.

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Excerpts from Markets Midday on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets

With foreign direct investment for multi-brand retail coming through, retail names have been the talk on D-Street. However, Nitin Raheja, chief investment officer at Rada Advisors is not completely convinced in terms of the valuations some of these stocks trade at. "These are event driven stories and will be driven really by the fact that if there is a deal on the table and the valuation of deal," he explained on CNBC-TV18.

He goes on to say that the elongated working capital cycle of these names is a big concern, which raises questions about the financial health of the companies. "More than the market potential, I think it's balance sheet concerns which are doing over these stocks ," he said.

Below is an edited transcript of his interview with Latha Venkatesh and Ekta Batra. Also watch the accompanying video.

Q: I will start with Parliament being adjourned and your outlook on FDI in retail and your approach on something like Pantaloons?

A: We all believe FDI in retail is positive. In other sectors that have opened up and there has been liberalization, prices have actually come down and consumers have actually benefited in terms of quality, prices and so on and so forth.

But it's not probably easy for the government. Obviously it has taken a bold step to do this, but I am sure they were aware that they would encounter this kind of resistance. There is a lot politicking that is going to take place. Unfortunately, every time we come to the beginning of a Parliament session, there is a belief that things will get better, that we will see more action and more bills getting passed. But things just don't seem to be changing and that is what a big concern is in terms of the government not being able to carry forward any particular agenda. All this is only making the perception value negative, even though the government is trying to do things.

Q: What would be your approach to those set of companies which will perhaps be able to tie up with these big guys? Single brand investments can go up to 100% and one is expecting some unheard brands in perhaps apparel coming in - would you worry for some of the brands that are there in India? There are lot of clothing brands like S Kumars and Arvind which could be faced with severe competition. Any stock recommendations positively or otherwise?

A: There are two aspects to it. Firstly in terms of how one would approach this whole retail pack. If one looks at lot of so called retail chains like Pantaloons or Shoppers Stop, we are really not convinced in terms of the valuations that they trade at even today. These are event driven stories. They will be driven by the fact that if there is a deal on the table and the valuation of deal. But on standalone or pure fundamentals basis, I don't think, a lot of it is already priced in to these stocks.

Secondly, is in terms single brands and more so on the retail side, our belief is that it's not going to be easy for even foreign brands. We have seen lot of foreign brands like Nike and Reebok being there in India for sometime. It's not easy to build out a retail reach which a lot of the Indian brands have done. So, I don't see a huge impact of this impacting some of the Indian brands.
A lot of the Indian brands have got beaten down. For instance S Kumars, it trades at two times earnings vis-à-vis that and probably there would be a better play looking at that. The concerns in these are different.

The major concern as far as businesses have got to do with is the working capital cycle. The working capital cycle has been hugely elongated for all of these and that has seen concerns being raised in terms of financial health of these companies and de-ratings of these stocks. More than the market potential, prospects, it's the balance sheet concerns which are doing over these stocks.

Q: The other big thing that's been playing out is the depreciation of the rupee. There will be some hidden gainers in that as well, some people who may now be able to make import substitutes because imports have gotten expensive. Are you spotting any winners generally?

A: Sure there will be some winners which will emerge in this. But the more important factor from market perspective has been that the overall trend of the market has been negative and the rupee has only kind of added to that trend.

Q: Is there a contrarian play which we may have missed?

A: We haven't looked at that at this point of time.

Q: Overall what are you looking at in the heavyweight space at all? We have seen valuations come down to somewhat attractive levels. Are you looking at the market itself as in buy zone probably now or in the next 5% or so? If so where would you start pinning in money hopefully at least to rescue capital?

A: We are looking at three or four characteristics for such companies. First one at this point of time is management given huge importance of corporate governance in such poor markets. Second is companies with low leverage and the third is low forex exposure. So, within that we believe there are no sectoral plays, there are bottom up stocks that we like. For example we like Aditya Birla Nuvo among the larger cap names. We believe there is a consumption story at play with low leverage on the books and valuations are very reasonable. It trades at under 10 times of earnings.

We might even look at a contrarian play. For example on the infrastructure side, someone like Power Trading Corporation . Things have reached ahead in the power sector where the gun is now pointed on your head and you are supposed to take decisions. We have seen electricity boards like Tamil Nadu, UP starting to make power hikes. Here you have a stock which trades at 0.5-0.6 times book value as concerns on the receivables have actually come off which we think are largely unwarranted.