Nirmal Bang Institutional Equities was betting on the Nifty touching 7000 by March 2014. This view is now under review, though the call hasn’t been changed yet. Chief executive officer Rahul Arora says 6150 has become an important level. Political scenario too has changed. In the last quarter of the last calendar year there was a lot of noise about the BJP winning the elections, which has now receded, he said.
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He continues to be bullish on IT and pharmaceuticals, but agrees with the view that a little bit of frothiness has come into these sectors. However, he think other sectors such as commodity, capital goods engineering, auto have not got the confidence on growth back yet. He advises investors to go in for companies, which enjoy high return on equities (RoEs), high return on capitals (RoCs) and reasonably good corporate governance.
He expects the rupee to weaken from current levels. He feels there is going to be a fight for capital in 2014 as India is not the only country or even emerging market going into elections this year. Nearly 42 percent of the world goes to elections in 2014.
Below is the verbatim transcript of Rahul Arora's interview on CNBC-TV18
Q: You have been bullish in the past when I have spoken to you. What is your market call?
A: Most of our clients as well have been bullish coming into 2014 and that was the stated call that we had also when we put out our strategy piece in March last year. We were calling for 7,000 Nifty by March 2014. As of this point we have not changed that call although it is under review. A couple of things have changed for us. 6,150 has become some sort of an important level even in the fund manager community and the fact that you have seen foreign institutional investors (FIIs) selling over the last couple of days close to this level is making people a little bit jittery.
Add to that the fact that a lot of the noise that you had around the Bharatiya Janata Party (BJP) wanting to win the elections which was the canter in the last quarter of the last calendar year has seemingly receded a bit. So I think there are a couple of variables just at the cusp of earning season that is probably going to advise caution at this point of time and not just irrational exuberance sort of assuming that Nifty would head to 7,000 just on an election wave.
Q: In your picks you did mention that IT and pharmaceuticals would be something that you would be bullish on going into 2014 as well, don’t you think that to some level in 2013, there was a little bit of frothiness which has come into the sector or do you see incremental upside coming in?
A: That is a valid point that you make but on a relative basis if you try and look for earnings growth beyond some of these sectors, I don’t think the confidence level is there just yet. So through our own channel checks, when we meet companies in the commodity space, when we meet people in capital goods engineering, even autos for that matter, that sense of confidence on growth is not coming back just yet.
I think the street seems to have sort of given up on the fact that the rupee can depreciate from here substantially. I think some of the variables, whether it is US tapering - let us not forget that nearly 42 percent of the world goes to elections in 2014 and some of the key competitors that we have that fight for capital, including Indonesia, also go to elections this year and some of the other emerging markets as well. So I think there is going to be a fight for capital in 2014, India is not the only exception, that is going to elections this year because a lot of froth has come into the system because of that I believe but on ground, I don’t think the capex cycle is anywhere close to reviving from our own channel checks, which is what leads me to believe that probably the trade for 2014 will be a strengthening US dollar, a weakening rupee.
I cannot foresee it going to 70/USD yet or 60/USD yet but I think definitely it will probably weaken from where it is currently. At the margin, if you see a US recovery, these stocks will continue to do well in addition to the point that you were making that they have already done well. So I think it is probably a polarization of valuations that will continue to exist in 2014 as a continuation of what you saw last year.
Q: Last year you came out with subscriber note on Justdial. Are you surprised by the phenomenal move that we have seen on Justdial and what are you advising your clients right now on this particular stock?
A: We put the stock under review now because last week the stock went to well in excess of Rs 1,650 and it was trading 80 times one year forward P/E and 20 times sales. So it does make an investor jittery. I don’t think there are too many other companies that have tripled your money in a six months horizon the way Justdial has. It is a Rs 11,000-12,000 crore market cap company at this point in time. We have spoken to some of the SME guys who advertise on Justdial and we got a sense that the RoEs that they enjoy are quite phenomenal. But I think at about Rs 1,650-1,700, which is the price that you saw last week, a lot of it may have been in the price. I would not advise people to come in and buy fresh into Justdial right now.
Having said that, if you are an existing shareholder, it may not be imprudent to take some profits but continue to keep a little bit on the table because the fact is that they are getting into high-end transaction value based services right now which could be the next earnings trigger that you probably see towards the back-end of FY15 getting into FY16. So a fresh investment into Justdial probably does not warrant itself at this market cap and this market cap to sales and P/E but like I said if you are an existing shareholder probably take some profits off the table but keep holding on some because there are some metrics in the company that are changing.
Q: You are underweight on capital goods as a sector but you like Voltas, your rationale?
A: In the case of Voltas, one of their largest projects that they had in the Middle East had a cost overrun because the entire design of the project was changed. If you go back to the conference calls that Voltas has been having, about 94 percent of that has already been booked and just a little bit left to be booked. The quarterly run rate that Voltas does by way of its order intake historically is what they are continuing to do hereon as well.
Our understanding with the interactions that we have had with the management is they want to get out of the designed phase of projects, which is what cost them in this one project that they have from Qatar and they are just focusing on the delivery and the operational aspect of it. Our call on Voltas is predominantly a revival in their engineering division where the margins have dropped about 1-1.5 percent, we are seeing a revival of that to about 4-4.5 percent by the end of FY15. So it is more of a margin recovery play with a standard order book intake that they have vis-à-vis the clarity that we have on some of their other competitors in the sector.
Q: What is the story on couple of these picks that you have, La Opala RG and Supreme Industries?
A: La Opala RG is a very interesting story. I don't think it is a stock that is covered on the street. It is about USD 100 million market cap company. It caters to the organised retail on the crockery side. It is a company that enjoys 30 percent kind of return on capitals (RoCs) and return on equities (RoEs). It is a company that throws up cash.
Although it has not caught the fancy of people because probably it is not a very liquid stock and the market cap is just about USD 100 million but the interesting part about La Opala is that the addressable market for the company is just Rs 2,000 crore. It does not do anything in steel crockery yet and it is not an end-to-end dinner set provider. So the addressable market for La Opala is Rs 7,000-8,000 crore and right now only Rs 1,000 crore is what it addresses of which 50 percent is organised.
So the organized market that it caters to is Rs 500 crore of which its topline is about Rs 150-200 crore. So I think the scale of expanding across India as it grows its product range is tremendous and that is why I think that stock even though it has done remarkably well, we have seen some institutional activity in the stock over the last couple of months. I think this could be one very interesting stock for retail as well as institutional investors who have a small cap fund or appetite for smaller stocks.
Supreme Industries is a very interesting play. Although Supreme Industries is perhaps I would say 20-25 percent lower than where it is currently, if you analyse all the product profiles of Supreme, all the verticals that it has, the margin profile is extremely strong, the order book is extremely strong, the management bandwidth is good, very strong return ratios again. We are looking at stocks, which enjoy high RoEs, high RoCs, reasonably good corporate governance, companies are throwing up cash and Supreme is one of those stocks that has done well for investors over the years. So probably not at this price if you get it 20-25 percent lower, it could be a great investment to have.
Not just that if you allow me there is one stock that is doing well today, Cadila Healthcare is another one that we are positive on. In fact, we did meet the management about 15 days back, we came out with the visit note, we upgraded it. That is another one which looks pretty interesting to us in the pharmaceutical space.
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