Speaking to CNBC-TV18 Niraj Dalal of 3A Capital Advisors said that growth is a priority and given the way things have been he doesn‘t see a reason why RBI governor Urjit Patel won‘t cut rates.
Speaking to CNBC-TV18 Niraj Dalal of 3A Capital Advisors said that growth is a priority and given the way things have been he doesn’t see a reason why RBI governor Urjit Patel won’t cut rates.
He believes there will be a rate cut of 25 bps followed by a dovish statement. “But I think the market is in a state where even if Patel doesn’t cut rates, there will be a blip,” he said, adding that markets are too strong.
Despite geopolitical tensions elsewhere, we have proved resilient. “There is 100 percent certainty he will cut rates in December, if he doens't do it this time,” he said.
Below is the verbatim transcript of Niraj Dalal's interview to Prashant Nair and Latha Venkatesh on CNBC-TV18.
Latha: I know you have a bunch of stocks that you are watching, but the market is watching Reliance Infra and Reliance Defence very closely just because of this order. Your thoughts on these two stocks?
A: I don't track Reliance Defence too much. I don't understand the company well enough. As far as Reliance Infra is concerned again it falls into the segment where over the next couple of years there is a lot of action. It addresses the needs, it's been in some sort of a corrective mode again they are trying to sell some assets, get stuff going so interesting stock, but again I will give it some time. For me on an investment perspective I think there are better infra stocks available in the market, which I would rather focussed on them than this one. Trading bet is a different thing altogether.
Latha: Your view on what you are expecting tomorrow and if it is a dovish tone. Is there anything that you will buy in advance or will buy after the statement?
A: Just a couple of things I think he has two options, the two options in front tomorrow are either he is dovish without a rate cut or he is dovish with a rate cut. I am of the camp that the statement will be dovish and there will be a rate cut of 25 basis points tomorrow.
Simply because as you mentioned the trajectory of inflation overrules most other consideration at this point in time. His first interaction after becoming governor, he clearly stated that growth is a priority and given the way things have been I don't see a reason why he will not cut rates.
The liquidity part I understand and that is something that they will take note of, but the trajectory of inflation and the concern on growth and the fact that we have a very different constitution this time, a very different way of doing things. I would believe that there will be a rate cut of 25 basis points with a dovish statement.
The market is in a state where even if he does not cut rates I think there will be a blip, but the markets are too strong. We have been facing external events geopolitical tensions and all it took to reverse what happened on the expiry day is couple of days.
A lot of stocks are already higher than what they were on that particular day. I think it is an event we should treat it as such even if he doesn't cut now I think there is a 100 percent certainty that he will do that in December. So, I think the direction is clear the bond yields have been giving us some indication, not 100 percent but they have been giving us an indication. So, I remain optimistic and I think you know once that the policy is over and if it is a rate cut clearly you will have to look at banking stocks, the real -estate stocks the ones which are the direct beneficiaries and I genuinely think and I have said this before on your channel as well that PSU bank stocks. I think they are really at a stage now where everything is falling into place one after the other. So, I would go out and buy PSU banks stocks here.
Prashant: Which ones in particular? Would you be able to pin point?
A: I have said this before, I will say it again. In terms of my investment thesis, I prefer the large cap PSU Banks over the smaller ones. So, State Bank of India, Bank of Baroda, Punjab National Bank, these are the ones that I would go ahead and put money in. But, there is no reason why Canara Bank or a Union Bank or a Syndicate Bank would not do well. What is important to understand is that we are at some sort of an inflection point with the PSU banking space. There were a lot of concerns six months back, a lot of them have been addressed and you can never time it. So, you are sure about the trajectory, you are sure about the valuations, if you are sure about things changing then, I should go ahead and buy. And again, you are not buying for a pop of 5-10 percent. You are looking at structural change. The valuations differential between the PSU and private sector banks needs to narrow and there is only two ways of it happening. The PSU banks keep going higher. That is how it is.
Prashant: A couple of other things that you like. Jubilant Life Sciences is one of those names. It has had a phenomenal run, especially anybody who got in a year, two years back, even a year back. It continues to do its thing, very strong. Would you outline your thesis there very briefly?
A: Again, the thesis is very simple. It is a small equity, about 16 crore shares, does about Rs 1,400 crore of revenue quarterly, does an earnings per share of about Rs 10. Earnings before interest, taxes, depreciation and amortisation (EBITDA) margin of 26-27 percent. So, just to put things into perspective, you have a pharmaceutical company which has a billion dollar sales which has an EBITDA margin of about 26-27 percent at a composite level, sales growth of about 22-258 percent and an EPS of Rs 45-47 on a reasonable basis. So, it is about Rs 600 today. Of course, it has got the approval today of Rubifil which will add to both the sales and the bottom line.
So, I do not see any other pharmaceutical company in India which has that kind of top line. It is what people are realising now and understanding. Jubilant Life was always one of those smaller pharmaceutical companies, but it has USD 1 billion of sales. That is significant from any standard, with 26 percent EBITDA margin, Rs 45-47 of earnings, give it a multiple of 18-20 and you are looking at a stock which is on trailing basis about Rs 900-1,000. It is as simple as that. Forget the upsides that will come from approvals or as new launches happens or as margins improve or whatever, you are looking at a stock which is - and as you mentioned, this is a stock which has gone from Rs 400 to Rs 600 within a month or two.
So, clearly it has gone up and here is where I tend to disagree with technicals a little bit that good stocks, they keep going up, it does not matter if they have gone up 10 percent, 15 percent, 20 percent and someone would have bought MRF at Rs 31,000 and thought Rs 35,000 is a great price to exit and you know the price today or for that matter Ceat, or for that matter, Apollo Tyres. They are all up 50-70 in a month. So, when something changes fundamentally, things go stretching more than you will believe.