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Last Updated : Apr 11, 2016 07:59 AM IST | Source: CNBC-TV18

Green shoots seen in auto, cement; like aviation, Infy: Agrawal

Raamdeo Agrawal, Join MD, Motilal Oswal Financial Services is very bullish on Infosys backed by Vishal Sikka‘s impressive leadership.

After a great rally in March, the market seems to be taking a breather in April and has been in a mood of consolidation. The question now is how to make use of this opportunity — for that one need to question an ace stock picker like Raamdeo Agrawal, Join MD, Motilal Oswal Financial Services.

According to Agrawal, if the RBI governor Raghuram Rajan thinks India is on the cusp of a revolution then that surely shows India to be in a good picture.

(In a CII organised Singapore Symposium 2016, Governor Rajan is known to have hinted at the above in a conversation with Singapore deputy prime minister Tharman Shanmugaratnam and Business Standard chairman TN Ninan.)

Basically, investors look at the market only with a long-term view, said Agrawal. The house does not believe in buying stocks for the short-term or for few months but looks at quality and growth while buying, he said in an interview to CNBC-TV18.

When asked what he expected from the upcoming earnings season, he said, if even 5-6 companies surprise us on the earnings front then the market could take it as a positive cue.

Sector-specific, he said, some sectors like cement, autos and roads seem to be gaining momentum. Within autos, the commercial vehicle segment seems to be gaining. Cement, too, will gain on lower prices and higher volumes, especially north-based companies, he said.

From the aviation space, too, stocks like Jet Airways, Interglobe Aviation will perform better. The house is especially bullish on Interglobe Aviation, said Agrawal.

He is bullish on the aviation space because according to him India is still largely under-penetrated and when more and more people start travelling by airlines, it would bode well for them. Also, with oil prices likely to remain subdued, it would be a big boost for the airlines. 

However, in the current quarter, PSU banks could be likely disasters on back of NPA issues.

With regards to IT space, he is bullish on Infosys backed by Vishal Sikka’s impressive leadership.

He also spoke on the likely reasons for HDFC to be under pressure.

Below is the transcript of Raamdeo Agarwal and Ashwani Gujral's interview with CNBC-TV18's Sonia Shenoy and Anuj Singhal.

Anuj: What is your sense about this market? Lot of stocks have made a lot of money, but at index level, we are consolidating or digesting March gains. How would you approach the markets from here on?

A: I do not look at markets for the very short-term gains or anything like that. So, what is going to happen in April or May is not a matter of concern for me. Generally I do not bother about very short-term movements. So, what happened in March, March was one of the biggest months, 10-12 percent kind of move. And actually, we saw one of the lowest subscription for mutual funds and highest redemption.

You look at what is the tragedy. The investors invested the highest amount and they took away the highest amount at the lowest index. And while they were taking away, the market took off and after that they must have been really feeling miserable.

Sonia: But that is how retail generally behaves.

A: Yes, but I wish my investors do not behave like that. I am sure that all across the mutual funds. We have seen that after 23 months, March saw a gross exit of about a few thousand crore by the investors. So, the month in which markets did the best job, they not only not bought anything, they actually took money out. So, this is the biggest tragedy of investing and right now, economy is in slow mode.

And one of the most encouraging thing today, real Gudi Padwa gift was today’s RBI Governor’s statement that India is on the cusp of revolution. He is not known for loose talking. This is not a political talk. There is something in that statement.

Sonia: In fact, I wanted to come to that. We noticed that there are some real signs of a pickup perhaps in the capital expenditure (Capex) cycle or green shoots, as you call it, whether it is auto sales that has picked up, cement sales have been good and even BHEL out of all reported good numbers. Would you corroborate that view?

A: Slowly, the recovery is gaining momentum. It started with road sector and we are seeing a lot more in a sustained way in commercial vehicles, we saw the March quarter being extremely good for some of the auto stocks. The results which are expected. Telco is going to be very good. Eicher is going to record numbers. Hero MotoCorp looks to be very good. Ashok Leyland will be very good.

So, auto sector in general will do well. Private sector banks will do well. Some cement company should also turn around on the lower cost, higher volume.
However, there are disasters as well in some segments - the entire PSU bank basket, we will again see a washout with the provisioning and all. You are going to see record results from Oil Marketing Companies (OMC). And then aviation companies will do very well. All listed, Jet Airways, SpiceJet and our own IndiGo.

The overall Q4 results are going to be very flattish, 2-3 percent plus, minus. But within that, there will be a lot of winners and losers. And it is going to be very narrow kind of winner kind of set. But as we go along in this year, my sense is 2016-2017, more particularly after the monsoon. So quarter after quarter, the momentum will pick up.

So fourth quarter this year, should be the best quarter compared to the first quarter what we are going to see in the next three months. So, I would remain bullish and I would rather increase my bets. We must keep looking for statements like what governor has said. You all should find out why he is so bullish. What is that revolution, this is a very aggressive for a central banker to say that.

Anuj: So, let us take it one by one. One of the stocks that you have liked and is one of your top holdings is Infosys. And that has been closed to lifetime highs if you remove the last four days when it has seen a bit of profit booking. But as a sector, do you think IT can do well, led by Infosys or do you think Infosys would do well regardless of what happens to the rest of the sector?

A: Infosys also has to go through whatever slowdown challenge or competitive challenge they have. But leadership does make a difference. What was the due share of Infosys in the last 5-7 years, they have not got it. So, this is a kind of reversion to the mean time. So, they will get back with a new leadership and new processes. Their deal wins have been very good.

And apart from the cross volume price mix, currency has been one of the big factors. Year-on-year currency has been 8-9 percent devalued. So, how the devaluation translation benefits in terms of rupee will be used by them, whether they are going to use it for enhancing the margins or giving out the employees or using it for the market or giving some concessions to for deal wins.

So, that has to be all seen when the results come. The mood seems to be pretty bullish about this result. What you hear about Mr Sikka’s interview recently, he has been sounding far more confident about his 2020 targets about USD 20 billion sales and 3 percent margin expansion and all. One is all set for, this is almost my first largest holding in the funds. So, we are all expecting good results.

Sonia: One of your other large holdings and if I may say so, the most volatile holding has been InterGlobe Aviation. I heard you briefly mention the aviation space. InterGlobe has now recovered from Rs 700 to Rs 1,000 after the management did clarify to us that Q2 disaster or fiasco you want to call it about the late numbers was a one time. Are you keeping the faith with this one?

A: Even at Rs 700 we kept the faith. So, you don't buy stocks for three months, six months or statement here and there. If there is a value there is a value at Rs 1,000, at Rs 900 or statements are a little bit here and there because this is one industry which is somewhat crazy in the sense that it has destroyed more wealth worldwide than it has created. But some companies are definitely won because of their own very unique strategy like Southwest in US or Ryanair. These companies have created wealth.

Now coming to Indigo India is a very unique opportunity in the sense that it is very underpenetrated in terms of amount of air travel which happens. We are talking just about 70-75 million passengers in a year. The number of aircrafts of that 180-200 seats is just about 225-250 catering to entire domestic market. I believe in China it is upwards of 2,500-3,000 aircraft, 10 times bigger. US every company is of that size. And then what is happening is that the travel needs in this large country is very high and railways in 30-40 years the trains which we are running 40 years back, for me to come from my native place it used to be like 20 hours, it takes same 20 hours, it comes at same time. I can't believe it. Now the prosperity and the challenge of time has increased so much that air travel is actually - if one can afford, sky is the limit in terms of volume.

One of the thing is that outlook on the oil is weak for next 4-5 years. So, if oil remains at USD 60-70 the ticket prices will remain very affordable and that will keep the market very stimulated year after year. And if that remains so, the competition is weak and these guys have 50 percent of the foreseeable capacity order under themselves with a 15 percent fuel efficiency. Right now it must be about 18-19 times. Now at Rs 38,000 crore market cap and we expect about Rs 1,900 crore profit this year. So, that gives about 20 times trailing, forward would be about 14-15.

Anuj: And there is expectation that this time there could be a decent dividend as well?

A: Dividend they will give because they have done that interim dividend before their issue. I hope they reward the post issue shareholders also.

Anuj: The other stock that I want to discuss is HDFC because that is dragging market quite a bit. It is now trading at its lowest valuations in the last five years, maybe historically low valuations. What is going wrong here? The market is clearly fearing something?

A: What I have heard is that there is some provisioning requirement which has come up because of their corporate loan book. That is the one thing. So, because of the mix they have a very unique mix of one third being corporate and two third being retail.

Retail is doing very fine, mortgage market is just roaring, it is going about 20-22 percent, they are the best in class intermediation cost. Liability is not an issue with them. So, they are in a very unique position, they have mutual fund, they have bank, they have insurance company. So, if you look at HDFC as a whole package consolidated they are growing at about 12-13 percent, Price-to-Earnings Ratio (PE) multiple is 16-17 or so. So, this is a very large unpopular stock right now. As things turn up they should do well, I don't think there is much of concern there.

Anuj: We had the RBI rate cut 25 basis points and now we are running into the earnings season as well. Do you get a sense that just in the near term the market is running out of triggers or do you think there are enough triggers and the market has baked in may be the worst of earnings and will move on regardless?

A: Market has enough triggers, they can cook themselves in the sense that some day they might have 10 percent spike in the oil price or some Chinese statement, government saying something, some US data, now you have enough global stuff. Then we have enough local things also happening, earnings season is starting which is most exciting for the markets. So, if you have series of 5-6 big ones coming out with big numbers, surprises I think market will definitely take warmth from there.

Market always has enough triggers. FII flows, 3 days USD 200 million, you will see the colour.

Sonia: One of the big sectors that performed in the last fortnight has been cement. I don't know how much to believe, most of these stocks are sitting at 52-week highs - Grasim, Ultratech etc. Is there really a pickup in cement demand or should you be a bit cautious on this sector?

A: If you believe that India story is going to happen, without cement nothing is going to happen. Very credible guys also are looking at cement, those who know the stuff. What Ultratech has done is terms of consolidation is amazing.

Cleary in last four quarters nothing has happened. Now if anything is happening, we are hearing from December there is a actual pickup in cement demand particularly in north. Good thing is that the cost is lower. So, your breakeven point is also lower. So, any uptick in demand immediately translates into bottomline expansion and it is a very high fixed cost kind of a business. So, there is huge operating leverage. So, what happens is 10 percent additional capacity utilisation can give you 100-200 percent increase in profits.

Sonia: So, it is still not too late to buy the cement stocks you think?

A: This is going to be a 5-7 year story. After so many years cement is going to come back. Not much capacity is in pipeline. There is good level of consolidation. Now the banks are in such a condition that they are not going to fund anything and everything.

So, I think in a lot of these capital intensive industries, one of the thing is that new capacities are going to be very difficult to come by unless profitability is extremely high. The speculative build-up of the capacity with the help of the banks that is not going to happen.

Anuj: Are we at the cusp of a new bull market? Can equities outperform real estate, fixed income, gold, some of these asset classes by a decent margin over the next 3 or 4 years?

A: If you look at 34 years numbers there is absolutely no doubt, we have made lot of money. I have seen this market growing by 250 times. I started buying stocks in 1980, index was 100, today it is 25000.

We have a better government, we have a better financial condition. At the bottom of the market we have USD 350 billion of reserves. We have fiscal deficit of 3.5 percent, we have inflation of 5 percent, everything is going for India. We have our governor also saying that we are at the cusp of revolution. So, there is no reason to believe that we will not make money.

The issue is how much money we will make. Will we comfortably double in next 5 years, I don't think there is any problem. I think to expect 15 percent compounded for five years is a very reasonable expectation.

I think we should be able to make it if there is not complete breakdown in the global economy or local economy. I think in normal condition of 6-7-8 percent growth - we don't need 9 percent growth for making 15 percent compounded.

Sonia: So, for the next say, one to two years if someone has a horizon where do you see more money to be made, is it in the midcaps or non-index stocks or do you think lot more value lies in the large caps?

A: The way we look at it is we look at independent of capital, capitalisation. We are looking at quality and growth. Wherever there is quality and growth you have a chance. If it is a Rs 1 lakh crore company we see that Infosys can also make money, it is at Rs 2.5 lakh crore. We are also bullish on TCS which is Rs 5 lakh crore. That is one end of it. On other end we have smaller companies where we are putting money, Indigo is say, now it is Rs 40,000 crore. So, it has become a little bigger. There are other smaller companies also. So, you can make money at any size so long as there is a quality and growth.

Anuj: Just one more stock question because we have to address this. Maruti Suzuki and the de-rating that has taken place because of Yen and that is one of your favourite stocks. How do you go through a period in which you see so much global uncertainty specially regarding currency which can completely change the equation?

A: Clearly in these kind of situations if after three years our outlook is - I mean after this hump, say 6-8 months once their Gujarat capacity comes in they will have enough capacity. They will have a capacity constrains for few months in this year and then they have this so called currency related issue, unless it goes completely out of hand, again Yen goes to 80 like that then you have a big problem but if it is 4-5 percent kind of thing entire three-four quarters is gone in earnings growth. It becomes very muted. But volume growth - markets have their own mind. What market can do is the PE multiple can shoot up. The earnings may remain suppressed but looking at the volume growth say, if your volume growth possibility is 20 percent because of the economic recovery and lower interest rates and higher liquidity and recovery in the economy by chance demand for cars is going to be very high, then what do you do. They are selling 20 percent higher volume, 20 percent topline growth but bottom-line is flat. Do you think the market will stay there? Obviously not.

So, what I am saying here is five year henceforth this will be a much larger company. Maybe it will be 2 million cars rather than from 1.1-1.4. So, we have that faith and with that only we kind of stay on. I am hearing what you saying and we are aware that the next 3-4 quarters could be challenging, let us see what happens with this result. Analysts they always make much more noise than what is the problem. So, everybody is consensus, but the problem is not that serious.

Sonia: Consensus is expecting about a 100 bps impact on Q1 margins because the Yen impact comes with a lag.

A: There we will talk after three or four weeks.

Sonia: One more stock specific question because a good company, great pedigree, United Spirits taken over by one of the largest, but regulatory issues as we all know and that stock is only getting hit because of that. How do you react at a time like this?

A: Regulatory issues will always be there but these are the kind of franchises which have a huge longevity. In investing and in the stock markets wherever the franchises are very long like 25 years henceforth also the same brands will be of liquor and whiskies will be sold and at a much more expanded kind of thing. So, what has happened is one third of India has this huge political/regulatory issues. And it is not that you have banned means there won't be consumption. There will be of course reduction in consumption but through some channels the stuff will reach there. In fact the bootlegging and underground activity will grow through the roof. So, I don't know of course this is a political reason of the state governments to keep it banned. Four states have banned so, if all 28 states go banned then the 4-5 percent of whatever is allocation that will of course see loss. But we think that it has a franchise, the party is yet to start in India. It is a duopoly and they have huge franchise.
First Published on Apr 8, 2016 06:34 pm
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