How are you looking at dishing out opportunities in the markets post October, particularly through the festive season?
It has been an interesting festive season mostly because things were much delayed this year. Last year, both Dussehra and Diwali were in October and this year that got delayed a bit. However, I feel the festive season has been okay. It has not been phenomenal but it has been subdued for a lot of the financial players because of the NBFC crisis. However, September results have been quite encouraging and the recovery in earnings is very slight.
We are looking at close to double digit earnings growth on the Nifty companies and I am hoping that no major bad news comes about. Going forward, a lot of midcaps and some of the largecaps are poised for a good valuationfor investors for the next three or four years. Some companies are still overvalued, but overall the market valuation has come down to much more acceptable levels.
How are you looking at earnings for the consumption pack in general and Britannia in particular?
Last year, we had a GST heavy quarter. In June, the wholesalers and retailers postponed purchasing until GST was launched. We saw lower earnings in the June quarter and correspondingly higher earnings in the September quarter. Most of the FMCG companies seem to have done very well in September 2018 in terms of delivering double digit net profit growth.
Even Britannia shows 15-16% earnings growth. This is good. However, many of them are still quite expensive. So, I would not say rush and buy. Valuations matter especially in these markets. You could grow earnings another 20% for two or three more years. If the PE came down from 55 to just 35, you would make no money even if the earnings came down that much. So be careful about valuations. Though it is very healthy on the consumer staples front, consumer durables are still weak. I expect that sector to recover in next two years.
What is your view on oil marketing companies?
I am quite positive on them at these valuations. I was quite okay with their earlier valuations as well. It was relatively low in terms of earnings multiples. The government did interfere at one point. They are able to continuously change pricing according to their own input prices. There may be some more corrections along the way but these are companies with fairly high ROE and ROC numbers. They do not have very high debt to equity. If they were not a government company, you would be valuing them at 2x or 3x this number.
I feel that having an allocation in them would be interesting in the longer term. Also as EVs pick up, all of these companies being real estate heavy and having a geographical footprint that goes across the country will be able to benefit.
They need a better corporatised approach but overall at these valuations, they have a lot of room to improve and I would keep that as part of portfolio. As a disclosure, I have recommended and own some of these stocks.
What is your view on real estate?
We have seen some good results here. Sobha results were okay in comparison but there is a bit of a overhang in a lot of these builders who are in trouble when they ended up passing over their properties to their NBFCs or to the banks who will have to auction them. Prices will falter at that point. They have not really fallen in the last couple of years but they are up for a point where real estate may not give heavy or great returns in the near future. Having said that, strong players like Godrej, Oberoi, Sobha perhaps are worthwhile to look at because in a distressed sector, they will get better deals than anybody else. They are fundamentally quite strong in terms of balance sheet strength compared to the rest. Avoid the smaller players here and look at some of the larger players.
The real estate cycle is yet to find a bottom, wait for distress to come in before going in and starting to buy.
What is your outlook on the midcaps?
We are still positive on auto and also some of the financials. Although the NBFCs have corrected substantially, some of them actually have the power to change interest rates. For example, take Bajaj Finance and the net interest rate that they charge. A lot of their consumer durables based interest rate is 18%,. All this zero percent EMI is just for show. The amount they earn on it is a 17-18% return on their capital.
Given the fact that for shorter-term loans, interest rate moving to 18-19% is not going to move the needle for most people. They will still think of it as a zero EMI product and so they are able to pass on the increase in input costs to their customers and have fairly strong balance sheets.
They do not have very long-term loans, have a good mix of short-term and long-term loans and they will survive this mismatch in short term liquidity on commercial paper that we have seen in the secondary markets.
So, I am positive on some of these financials and some banks as well. I cannot take a lot of names because we are still in the process of purchasing them and we are also positive on auto and auto ancillaries, especially commercial vehicles, A lot more will happen in that segment in the next two years.