Bullish on Apollo Tyres, Shriram Transport: Sanju Verma

The government has taken a lot of bold measures over the last few days. In an interview to CNBC-TV18, Sanju Verma, managing director and chief executive officer, Violet Arch Capital Advisors says the sheer intent of government is reassuring.

However, she says, one will have to wait and see how this whole thing pans out. "We have to be a bit circumspect before going the whole hog and saying that the market should rally simply because announcements have been made to that effect," she adds. She is very bullish on Apollo Tyres and Shriram Transport. "Within financials, Bank of Maharashtra, Shriram Transport and J&K Bank would be the pecking order within the midcap space that we cover at our end," she adds. FDI in insurance cleared: SP Tulsian bets on three stocks Below is the edited transcript of her interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy. Q: Were you surprised by the manner in which the market has reacted today? A: I am not particularly surprised because I think the market has rallied pretty smartly in the last one to one-and-a-half month. We certainly have a sense of vindication because much before the state of reforms were announced and there were host of upgrades from various brokerages, in our strategy piece dated June 5 this year, we clearly called for a price target of 19,300 for the month of September alone with or without reforms. The market ended just shy of 19,000 last Friday. I think rather than the content of reforms, it is the sheer intent with respect to the government’s agenda going forward. I think that is what is more reassuring. People are smart enough to understand that while it is one thing to say that there will be 100 percent FDI in single-brand retail and multi-brand retail will now be open to foreigners and aviation will be open to FDI, the fact of the matter is that money is not going to come in a rush. Why would a foreign company want to invest in Jet Airways which has debt to the tune of Rs 12,500 crore on its books? What is so great about investing in Kingfisher which has a marketcap of less than Rs 1,200 crore, sitting on debt of more than Rs 7,000 crore and needs Rs 5 crore per day just to take care of its operational expenses? I think while the affordability of capital will not be an issue because of the spate of reforms, the fact of the matter is there are still a lot of structural corporate governance issues that need to be tackled before you actually see the material inflows coming in. Don’t forget even the Insurance Reforms Bill has been hanging fire. It came close to passing muster in the Rajya Sabha in 2008, but in the last four years nothing has happened. Also, don’t forget that the key allies of the UPA, the DMK, the NCP and the National Conference, on some or the other pretext, were not present in the cabinet meeting which actually took these reforms forward. So, I think we will have to wait and see how this whole thing pans out. We have to be a bit circumspect before going the whole hog and saying that the market should rally simply because announcements have been made to that effect. _PAGEBREAK_ Q: Would you say this is now going to be a stock picker’s market and buying the index the time is over? You like Apollo Tyres and Bank of Maharashtra. A: Apollo Tyres, despite the stock having done reasonably well, there is a structural positive now. Between FY08 and FY11, rubber prices went up exponentially by anywhere between 100-150 percent. Those costs in the recent past, in the last seven-eight months, have come down by 20 percent, but still prices are pretty firm. So, we believe that given that global growth is slowing down, rubber prices will come down, structurally there is a positive kicker. Despite the fact that the company’s CAGR revenue growth may not be more than 9-10 percent over the next two years, the fact of the matter is that the earnings trajectory will be pretty strong at anywhere between 20-25 percent going forward. Hence, one can certainly be bullish on this stock. If you really have to place your bets on both the auto space and the banking space, combine the best of both then you really need to place your bets on is Shriram Transport. That has 25 percent of the CV financing market in India. There is a structural shift here with the company now focusing on the LCV segment, which is slated to grow at nothing less than 15-18 percent in FY13. We all know that the middle and heavy commercial vehicle segment has been degrowing at the rate of 2-3 percent. We believe that it will degrow at the rate of 6 percent in this fiscal. So, clearly the shift from MHCV financing to LCV financing is what will drive Shriram Transport going forward. We have actually been very conservative. The stock has always traded at a historical price-to-adjusted book of nothing less than 2.5 times. Given the regulatory uncertainty with respect to NBFCs, we are actually valuing the company’s NBFC business at just about 1.9 times. We are still calling for a price target of Rs 752 which usually translates into a 20 percent upside from current levels. This has barely moved in the last one month. Within financials, Bank of Maharashtra, Shriram Transport and J&K Bank would be the pecking order within the midcap space that we cover at our end.