It is turning out to be quite a happy Diwali, not just with the market levels but with the kind of earnings and the commentary that we have been seeing. Let’s pick up from we have heard from PSBs and more importantly the strong commentary we are hearing from , Axis, etc.
I think banking is in a very sweet spot. Large banks have got pristine balance sheets, very strong capitals and the reach is outstanding. This is where most of the value is going to enumerate.
We can say the same about the biggest underperformer of the last Samvat, ITC. Who would have thought that the brokerages this morning are going to up their targets all the way to Rs 375? Do you believe that even after this kind of a steady up move, one can still add ITC to their portfolios?
It is a very happy day for us also. We have a series known as Lionheart series and we put ITC into that category at around Rs 167 a year and a half back. We were very positive on that definitely because we believe that the FMCG business of ITC needs to be re-rated and it has happened. It has happened much faster than what we thought and we continue to believe.
If you look at even today’s numbers, one and a half year back, we had thought that ITC should exit its FMCG business at around 7.5% of EBIT and today they have declared 6.6% of EBIT so we are very positive on ITC. We continue to believe that this should continue to see a re-rating. Our target price at the moment is around Rs 425 but definitely if there is a trigger of the company’s splitting into different units or a possible sellout of the hotel unit, further re-rating is going to happen. It should be a part of the portfolio and one should continue to buy on these levels also.
There are lots of moving parts when it comes to but given the way the stock has performed, what do you think the Street will be very keen to hear from ?
A couple of things. One of them is the petrochemical business. In the last three years, their per tonne EBITDA has almost halved from around $320 a tonne. We expect it to deliver something like $185 this quarter and it is around 20% of the business. We want to hear what is the future there, what are they looking at and if they are seeing prices and EBITDA margins going up there.
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Obviously GRMs are a concern because their GRMs seem to have peaked out last quarter. How do you see it going ahead? Retail and telecom business continues to do well but we would want to listen to the ARPU for the telecom business. India’s telecom industry being more of a duopoly with Vodafone being a weak player, why is Jio ARPU not going up? When are they planning to take a hike because telecom is an essential part of life for everybody and there is a high chance that they should do it now. These are two or three things I want to actually look out for from RIL’s result.
What would you recommend for this Diwali?
I have written down three names which are in the largecap, midcap and the smallcap category. ITC is obviously my largecap pick. Last Diwali also, I was positive on ITC and I continue to be there. I just enumerated what my thoughts are around ITC.
Triveni Turbine is the midcap pick. It is a very strong company but for two-three years, they were not able to get top line growth of more than 2-3%. But now their order books are very strong and we believe that for the next two or three years, the visibility is very strong for at least a 20% kind of a CAGR growth for Triveni Turbine and 20% top line comes from maintenance income which is a very high margin business. So that stock looks very interesting to me.
The management is also very good out there so this stock is available at around 30 times FY25 we believe it should go up to around 40-45 times. So, that is my midcap pick.
On the smallcap side. we have La Opala which is the leading manufacturer of dinnerware and their last capex has come through. I think the spending is over now. They have to just go out and sell in the current quarter and the next quarter. This is the festival season and the gifting season and I believe they are going to have a very bumper quarter. These are my three picks for the current year.
We have seen a mini-rerating in mid tier banks from a to IndusInd Bank from to . Is that rerating now over in midcap banks?
Historically, I have seen that when the tide is up, all boats rise and for the banking sector and for the finance sector, the tide is coming almost three years after the IL&FS fiasco happened. It has taken three-four years for the system to clean up, over leverage to go down and most banks to get their capital back.
I believe this is just the start of the whole rally. The tide is still strong and there is demand in the sector. So the rerating should continue. We have to specifically look at some of them and might have run away quite a bit and that is why we may not rerate.
But for the sector as a whole, I continue to believe there is going to be a rerating happening as they come out with stronger numbers, better visibility and capital raises.
What do you like in the midcap banking space? has run up, BoB has run up, Union Bank has run up. All large banks have run up. Now, it is the mid tier banks which have a strong balance sheet, capital and the growth rates would be much higher than large banks?
One has to be a bit choosy because it is still early days. I would go with strong balance sheets, clean banks basically. I like Federal Bank, CUBK. I would be putting money here and as the risk appetite goes up in the system, maybe I will go down that ladder.
At the moment, I like these two banks; historically there are no problems. The NPA issue was there at Federal Bank which has cleaned up and they have recapitalised well. Now they are showing good growth also for the last two-three quarters. So Federal Bank and CUBK are my picks among midcap banks.