Source: The Economic Times
In an interview with ET Now, N Jayakumar, MD, Prime Securities, gave his views on Indian and international markets and global economic scenario. Excerpts:
ET Now: Characterise the markets environment for us?
N Jayakumar: I think the fall in the US markets boards well for the markets here. So if you just see the market action over the last few weeks or especially the last few days, you are seeing return of money to this part of the world. There is a dollar weakness and I think some of the thesis that was played out in terms of money moving to the developed markets, that thesis is unwinding. So my own take is that what you are seeing probably yesterday was an exaggerated action as a result of weak US economic data, but the underlying theme is still that you can fantasize about QE2 being removed and QE3 not coming in. But in some real sense they need it. The crutches required for the US economy still continue.
Some of the European economies like Germany, etc, have been doing fine, but in the larger context of Greece etc. they are weighing down. So this movement of money really has happened and they expected that those markets will start delivering returns and money got pulled out of this part of the world. But whether we like it or not, money is going to start coming back here and the dollar index is telling you that. And if China and India, which have been in some senses the deterrents, start managing the local environment a little bit better, I think money will come in.
ET Now: What is working for India in the near term and causing this rally? Would you say it is only the dollar weakness and that for the shift because the earnings have been bad? There have been downgrades kicking in, you have got the GDP and the macro picture is really not helping us.
N Jayakumar: When these kinds of headwinds kick in, when usually everybody on the street is worried, that is really when smart money walks in. We attended a couple of conferences and people tell me that while participation is high, but the mood is pretty downcast, the people are worried. When the street is worried, these contra rallies emerge. And if you look at it, the story of India is not about the front-liners as we speak.
The story of India over the next two years is going to be one line and I call this the ticker price being manifold, which is really the story of mid cap India where whether you have a Sabero Organics selling out at 4x or 5x to average market price for the last one year or Camlin or you talk about an Andhra Paper or Intelenet, you are talking about first generation or second generation entrepreneurs having run businesses for 30, 40 or 50 years. The BPOs of course are much smaller in terms of lineage. Now saying that the market or the ticker price is not giving you what you really wanted in terms of value…
ET Now: But there handful of such companies?
N Jayakumar: No, what it is telling you is this is not a one off and add to this the fact that there are multiple delisting stories, and Atlas Copco contemplates a delisting at Rs750-Rs800. Delisting gets actualised at 2750, a whole bunch of other companies, Siemens increases a stake in the Indian company with a well traded stock price going at 25-30 PE but pays 30% over. ABB does the same. I think this is indicative of the fact that, firstly, more and more delistings which mean that more and more international companies want to have a 100% holding here.
Secondly, those who want to set up a beachhead here whether it is for FMCG which is for clients or it is for markets, they will come in and pay substantially more and this will act as one of those all boats will go up in this. Because this is not possible that one company Andhra Paper does a transaction, the others do not follow suit. This is like cement the way the consolidation happen. So I think this is a big story here. So well the index at one level gives you hope that around 5300-5400 level there is money that always walks in, but the real story in the next two years is going to be midcaps, midcaps, and more midcaps.
ET Now: Now that you made a case that it makes sense for our viewers to buy mid and small cap stocks, identify some names for us?
N Jayakumar : For the first time, I am saying the story is really not in small or one of names. I think the market as a whole is crying for attention. If you take the midcap space as a whole, these have been quoting at probably sub 4000 equivalent Nifty levels.
ET Now: Which are your favourites?
N Jayakumar: We will come to the favourites. I am just saying I think the story is not in the favourites. The story is not one of names. The story is in the fact that corporate India is seeing a sudden burst of FDI action where strategic interest across industries is happening. So you take a case like Camlin, people are predicting it which is that multiple family members, second generation or third generation to an extent involved, but may be when given a large ticket size they were very happy exiting. I think this is going to be the case of for a whole bunch of dominant companies in industries. Now the larger ones like cement, steel etc. have already seen much bigger action and people with large ticket sizes.
What is more difficult is to predict industries which are defined by one or two companies niches and that is where one will look at. The other big space and if you talk about favourites, we have our favourites. I do not think every broking house has got its recommendations. We for instance like Alok Industries. We have defined four or five parameters which actually could also be of interest from a strategic perspective. Companies that have a reasonable, let’s say, for the next two to four quarters or six quarters a reasonable kind of business case, you can make out, but more importantly a clear case of deleveraging, a clear case of full tax provision where they are paying out full tax.
They are not skipping dividends but more importantly there is clear indication that promoters want to increase their holding. So wherever promoters are increasing their holding there is de-leveraging happening, no case for dilution and they are going at single digit PEs. Inevitably these will become cases for either strategic people to look at or the markets to look at. I think free cash flow in capital intensive industries wherever they start coming through that is where attention goes.
ET Now: Does Alok Industry fit that well because if you look at the equity base of Alok Industry humongous?
N Jayakumar: Forget equity. The big opportunity is 11,000 crore debt. In the next three years, the management has clearly set for instance that they want to eliminate their real estate portfolio. They very clearly stated they want to even exit the UK retail business. If they do these two, they could pull in Rs 3000 to 3500 crore from non-core activities. So suddenly your debt goes from 11 to 3.5 and that 3.5 they do nothing else, must add to their 2000 crore market cap. So if 2000 becomes 5500 crore just on reduction of debt that is already a stock going from x to 2.5x, add to this the fact that they will do a Rs.12 pre-tax EPS. We expect about post tax about Rs.8.5 to Rs.9. Why should they not quote like Arvind Mills at 8 or 9 PE this could be a three bagger over the next 18 to 24 months.
So this is the story of corporate India where these kind of spaces where entry barriers to my mind were reasonably high, where people have gone through the difficulties in terms of debt restructuring, they have gone through difficult environment and now you are seeing probably a clear two-three year window where business could really boom. Then you will see the free cash flow coming, de-leveraging happening and the equity value kicking in that is the clear story here.
ET Now: So what about niche consumption names, the likes of VIP, Titan or a Jubilant Foodworks for instance?
N Jayakumar: They are all going at substantial PEs, the market right now and that is the beauty here. 90% of the market focuses on momentum, focuses on chasing and making a 30 PE stock into a 35 PE stock into a 40 PE stock. If there is ever a small something that pricks the bubble in terms of the consumption theme for whatever reason, you could have these stocks de-rating pretty aggressively. The India consumption theme is well played out, but it is not that you can keep buying these at, of course when somebody bought Jubilant at 600, I found it expensive at 450 to tell you the truth but it is at 850. So the call gone wrong, I would rather have missed it.
Not because it is a case of sour grapes, it is a case of saying that you are chasing a consumption theme. Now maybe food has got a massive upside and they are looking at corporate news, Starbucks etc. At the end of the day, some of these may play out, some of these may come much later or these JVs may not happen but the real thing is VIP for instance is a lot less hyped up as compared to the others. Titan is richly valued. It continues to perform in terms of numbers, but it is richly valued.
So the consumption names are not cheap, but the issue really is would you rather have a margin of safety by going into “a dumb, old economy, cash flow-oriented name” which does not have a high PE, but at least the margin of safety is reasonably high. So if somebody talks about uncertainties in the environment, I would look back and say let’s get into areas where the margin of safety is reasonably high where the returns may take time coming. All these names I mentioned may not have strategic action, but if any of these do, the returns could be 2 to 3x and I feel in any case the time for re-rating the mid caps has come through.
ET Now: You have liked sugar in the past, Shree Renuka has been your preferred pick.
N Jayakumar: It has not worked out well, no question about it. Shree Renuka has not worked out and the reason it has not worked out is numbers have fallen far short of expectations. Sugar prices have come off and there the underlying question is the presence of lose money in the world has meant that a lot of lose money has gone in principally into commodities and completely distorted short term prices of all commodities. Sugar was no exception.
So when it went to 35, we had managements coming out and saying that we see 40 cents etc. The reality is down to 23 cents. So the profitability in the near term, managements have followed up their line of thinking and I do not necessarily believe that that may have happened, but essentially, the orientation of management is a lot to do with the way stocks play out and there the fact that managements were far more bullish on sugar prices, not fundamentally driven but prices that were driven by speculators in the commodities market and as margins in those markets started going up or as money started getting pulled out, you had a serious erosion in commodity prices.
Even today the weak dollar may well be a support for commodity prices but the fact is how much of these commodity prices is driven by demand supply and how much of it is driven by speculation; it is only about 10-15% that is demand driven and news driven. The rest of it is entirely losing money. So from a commodity perspective, that is the one caveat that we need to, which is why Renuka Sugars being international into commodity prices has been more volatile than some of the other sugar names. So sugar has not played out. It is a theme that maybe was pitched on rising sugar prices which was not exactly the case.
ET Now: What about the NBFC pocket, are there any names that interest you?
N Jayakumar : NBFC, we are keenly awaiting this RBI notification on new banking. The one name that clearly stands out which we actually love is Aditya Birla Nuvo. It has got a fantastic portfolio. Anything they do from here will be an unlocking of value. It is one of those cases where every business is doing well. They can actually unlock value by giving sharper focus to individual businesses. I am hoping at some point in time holding company norms are coming to force and therefore an Aditya Birla Nuvo is able to do much more for the shareholders and it has done.
It hit a 52-week high yesterday in a market, at 10000 crore market cap, I would not say it is a large cap with $2 billion, it is still far short of what it can be in terms of the portfolio. They have got a lot of disparate parts, the BPOPs whether it should be there is an issue and by the way the numbers that have been announced have been without, they have announced 750 crore PAT number compared to 75 crores last year and this does not even include the Idea consolidation where the numbers have not been announced. So Aditya Birla holds a lot of promise and now with hopefully both in insurance and the mutual fund business some stability coming, this could be a stock that could dramatically surprise you on the upside over the next 12 months.
ET Now: But does not make sense for our viewers to buy holding company stocks because holding company stocks always traded at 20% to 30% discount to the intrinsic value?
N Jayakumar: But this holding company I am just saying whatever they do from here and I suspect at some stage, they will start removing pieces. For instance, carbon black, which is a big piece. They have different assets in different companies. Maybe there is a consolidation there that is waiting to happen. Maybe there is some spinning off there that is waiting to happen. Some of these are beginning to help. Take the case of Essar Ports de-merging and the kind of shareholder value that it threw up even in the short run, a lot more de-mergers.
Clutch Auto talked about it yesterday. So, a lot more de-mergers and corporation actions in this market may be a positive surprise for shareholders.
ET Now: Let’s get a disclosure going.
N Jayakumar: Disclosure, very clearly we are interested in what we speak and I want to repeat that at the risk of getting the wrong side of regulators, clearly we are interested. Our clients etc. have positions in these and would be interested in any or out of the names mentioned, but one last thing, the other reason I am really bullish in equities is in recent times over the last 3 months, I have seen just like individuals chase momentum in markets and they also chase stuff that moves, a lot more people and parties talk about commodities than they have ever done before and the people have not been able to get to grips of the volatility of an equity market. God help them when it comes to moving into commodities.
ET Now: So the party talk is commodity, it is no longer equities?
N Jayakumar: It is no longer equities. A lot of us feel reasonably ignored because nobody wants to hear ideas. People want to hear our ideas as it were.
ET Now: So let’s nail it down to 2 ideas out of the 6 ideas you have discussed.
N Jayakumar: The 2-3 names I would say Orchid, Alok and ABG, these would be some of our top ides.
ET Now: And one year price target, 30%, 20%?
N Jayakumar: Price targets never. Markets overshoot and they could surprise substantially more than that.