The recent volatility in the market notwithstanding, Dipen Sheth, head-institutional research at HDFC Securities, says there is no doubt that Indian equities are headed higher from hereon. He feels that India now has a government which is making all the right moves at a steady pace, which is an incremental positive for the Indian markets.
According to him, structurally nothing has changed for India despite the 10 percent odd correction. Sheth continues to remain a buyer of Nifty at current levels.
He feels another positive for the Indian markets as well as Indian macros is oil prices. He says, according to consensus view, oil prices will be lower than current rate. After the recent OPEC meet, it is obvious that oil supplies will not come off and neither will the US shale gas production go down.
On the recent controversy related to Sun TV, he believes that the political overhang may impact the stock negatively.
Sheth says ITC is trading at attractive valuations.
Below is the verbatim transcript of Dipen Sheth's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Sonia: We were just hearing from the experts at Morgan Stanley where they mentioned that in a relative sense India is still better placed than other emerging markets and they continue to maintain that this could be a shorter term bear market but it is in a long-term bull market. Do you think the structural India story is still in tact?
A: You have said almost everything I wanted to say; there is not much to add to that. However, I think we need to now look at India through a slightly longer term and more mature length. I would go out on a limb and say why even compare India with the rest of the world? We know what is right with India and what is wrong with India for a while now.
So, whether it is demographics, whether it is capability to grow off a lower gross domestic product (GDP) base and whether it is whole lot of positive things that can happen in terms of infra build out and the opportunities around whole lot of consumer centric and infra centric businesses that can play out, then India’s traditional capabilities and things like software and pharma and so on, I don’t think there is any question about the fact that India and Indian stock market can do very well from hereon. What is important and what adds the icing on the cake here and it is important to look at it this way especially when there is some kind of conviction stress test playing out on India that you actually have a government which is doing all the right things albeit slowly and steadily. Incrementalism as some would say.
If we get this part right because this has been a very big stumbling block for India for I don’t know how many decades that the governance and administration mix has been sub par compared to any other economy which has grown and transitioned from low income to even middle income. The big stumbling block is now getting dismantled and removed in many ways. I think it is happening much slower than what I would have aspired it to happen but then I am not an expert on governance. So long as the direction is right, this is a market to remain bullish on.
Latha: Nestle and Sun TV, would this be a buy in distress case?
A: I must confess that they are both getting close to that region now. This morning we have released another edition of our largecap portfolio in which we have added to Sun Pharma. We still don’t have Nestle in the portfolio but it is getting to a point where it will become enticingly attractive.
Sun Pharma is also in some kind of distress. On Sun TV I think there are clear governance and regulatory things coming in the way. The political alignments of the promoters are getting in the way and might lead to the kind of stress that rational investors may not be able to fathom or figure out at this point of time. So, I don’t want to take sides here and claim whether they are being victimised or not, I don’t think that is for me to figure out.
It is a much clearer story in the case of Nestle where there is admittedly some evidence that products manufactured by the company are not inline with the statutorily defined standards. Once the facts around the case come out – a whole lot of us are right now jumping and making conclusions about this, I think let the facts come out. This is a great company, a great organisation and to my mind they should be able to figure this out, whether it is product recall, whether it is settlements, whether it is fines. I don’t know where this will ultimately go but they do have the capability to put things right even from hereon.
Latha: What about the Nifty values itself or levels? Do you think that in the current mood, you could see 7,800-7,500? Are you a buyer already or will you be a buyer only at those levels?
A: Let me take you back to what I was telling Sonia a few minutes ago. Fundamental and long-term structural changes are being unleashed in the governance and administrative setup of this country. I do not think it is for us to decide a 7,800, 7,900 or an 8,000 level to figure out where we want to buy. The fact that markets are at a 2015 low, we are something like 10 percent down from recent highs and the fact that structurally nothing has really changed– so again, I am sounding like a stuck record on this, the two big things that were wrong with India were one, poor governance and two, excessive dependence on external oil, external energy or imported energy.
Oil prices will certainly be lower than here; that is the consensus. If you look at Organisation of Petroleum Exporting Countries' (OPECs) last meeting – I read an article which was titled that OPEC has just signed their suicide note. What that means is that there is no way that oil supplies will come off. There is no way that innovation is going to stop in shale oil extraction in the United States and to me USD 60 per barrel also looks an optimistic oil price level. So, that works in India’s favour and an arguably slow and steady grind upwards in the quality of governance should make you constructive on India. I am a buyer at today’s Nifty and I will be a buyer at 7,800.
Sonia: I was just going through your portfolio changes and you have a 104 basis point overweight on ITC. Would you not be concerned about the ban on loose cigarettes, about the multiple excise slapped on the cigarette industry?
A: If you look at this note that we have released, it is entitled ‘The Return of Merit’. Cigarette’s is anything but a merit industry and having lost more than one relative to cigarettes in the last few years, I can confess that I am not a fan of cigarette smoking. However, be that as it may, it is still legal in this country and in most countries of the world.
Here is a company with 80 percent or so market share, unparalleled pricing power after three years of what can only be called an oppressive tax regime where excise was ratcheted up to way beyond consumer inflation levels which were anyway running high. They haven’t posted a decline in cigarettes EBIT despite the big cracks in volumes that you are seeing.
Today ITC is the cheapest largecap FMCG, if you can call cigarettes FMCG, so it is the cheapest largecap FMCG stock in this country. Even after doing a stress test of all kinds that excise would go up even more, volumes will crack 9 percent again this year and a 20x cigarette EBIT as oppose to 22x composite earnings where it is trading right now and just giving about 2.5x revenues to their ex-cigarette FMCG business, we are still getting a Rs 321 stress case valuation on ITC and something like Rs 380-390 for fair value; I don’t see why should not be constructive on ITC. It is bargain value.
Sonia: So the worst is in the price is what you are saying?
A: Absolutely.
Sonia: The other stock that you have picked out or you have added into your portfolio is HPCL, that is your alpha pick. Great numbers by the company and as you were saying a lot of positive triggers for the oil marketing space but don’t you think a lot of it is already known, well discovered so the gains might be limited?
A: Year and a half ago or so HPCL was available for maybe Rs 300 or so. Everybody was worried about the way debt was bloating up on their balance sheet because of delayed under-recovery receivables building up and oil cracks. New government comes in, diesel remains deregulated after it hits the zero under-recovery level.
HP markets 2x the volumes of diesel that it refines and diesel marketing margins have been left untouched for maybe the last five or six years even as petrol marketing margins have gone up. So, if diesel under-recoveries remain at zero and they will because oil is headed for softer times even from hereon, the balance sheet cure that has played out in HP is now going to be bolstered with a dramatic increase in EBITDA over the next two or three years. Diesel marketing margins are not something that the government is going to increase at its whim and fancy just because I am aspiring for it.
These are legit profits that are due to them benchmarking diesel sales with other fuel sales and even if this change were to happen slowly, the sensitivity to diesel marketing margins for HPCL earnings and indeed EBITDA is so high that there is a lot of value in HP today. Our forward looking numbers on HP talk of something like Rs 77 earnings or something based on USD 80 per barrel oil and a much more fractured balance sheet.
Sonia: So that would be what in terms of a target price?
A: Today we have a target price of Rs 850 for HP but that could be revised significantly upwards in case marketing margins were to go up from here.
Latha: Leave us with a few midcap picks?
A: We have been throwing midcap ideas through your HSEC midcap portfolio which we released a while ago. Not all of them seem to be working right now but if you want the established stories which are on a roll, which will continue to remain on a roll then I will just go back to my old and worn out ideas such as Orient Cement and Sanghi Industries in cement to DCB and City Union Bank in the financials. So, name your sector and I can come back on what you are looking for.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
Find the best of Al News in one place, specially curated for you every weekend.
Stay on top of the latest tech trends and biggest startup news.
