ET Now
In an interview with ET Now, Prakash Diwan, Director, Altamount Capital Management, shares his views on some sectors and stocks. Excerpts:
ET Now: What is the sense that you are getting about the IT pack? Is it time to now profit book considering these stocks have done so well or do you think they still have momentum with them?
Prakash Diwan: No, it is a mixed bag of sorts. The fact is that Wipro came up with numbers that suddenly started seeming disappointing because it came after TCS and Tech Mahindra. So it is all relative at the end of the day and there is this likely churn that would again see a reinforcement of HCL Tech, TCS, Tech Mahindra’s supremacy compared to Infosys and Wipro. So the differential would keep on increasing. People are not happy to buy into IT companies at current multiples unless the growth rate is significantly higher and as demonstrated also. So I believe the punishment is going to be much more severe for weak numbers, but the momentum for some of the good stocks like Tech Mahindra and Hexaware would continue even into the current quarter.
ET Now: One, the insurance FDI and what does that mean for Reliance Capital and two, if you have looked at M&M Financial closely especially post the numbers?
Prakash Diwan: Yes, let me take M&M Financial first. Very clearly, something that was in the making for the last maybe more than just one quarter. So whatever we have seen cannot go wrong, things cannot go wrong in just one quarter to get these disappointments, but given the fact that the management is aware of the causes behind the shrinkage in names and the kind of impact that it has had on its margins means that they will be able to take some corrective steps on that and it could start offering great value once that clarity comes through. So I would rather wait and watch, but M&M cannot be written off so quickly, so easily with this disappointment.
On the FDI, very clearly it is benefiting Reliance Capital the maximum because of the kind of structure that it already holds with foreign partner that is more than willing to expand into the equity and we have seen historically the rates they have paid for getting into the business, I mean fairly higher than other companies. Disappointment was Bajaj Finserv which really did not benefit out of this entire thing because of this interlock of life and nonlife business together with the same partner and going forward, this whole hullabaloo around the insurance FDI will mean that we will not keep on seeing spikes in these companies and they would start having to get rated organically on whatever operating leverage they create. So by virtue of that, they will become much more long-term portfolio player picks rather than just tactical picks that all the time they have been.
ET Now: Biocon, Ipca Labs, Glenmark Pharma -- anything that is standing out?
Prakash Diwan: In fact, it is wonderful that Biocon has fallen in spite of okay numbers. If you read between the lines and also all the lines of the management commentary, very clearly it is a blockbuster in the making. You just have to be patient with it. So just go ahead and buy it during this week and I will start accumulating it for the longer-term multibagger story of sorts.
ET Now: I want to come to you on CEAT. What does one do with the stock now after the huge disappointment we have seen?
Prakash Diwan: The numbers have only ratified what people were always apprehensive about in terms of the stretch valuation that some of these tyre stocks had started enjoying, but if you look through the numbers of other companies in the space, one company that stands out very clearly, I will come back to CEAT of course, but JK Tyres for instance today is available at something like a 7.5 multiple of FY16 earnings and 9 times FY15 earnings. There is CEAT and the same token was in double digit, was actually double of this, was at 18. So there has to be rational and I do not think CEAT had any kind of product strength or product mix to back that also. So it has finally come where it deserves to be and I am sure it will continue to be quite weak for a while before the earnings pick up happens.
ET Now: Let us start with L&T. Can the results disappoint because things have really gotten off the ground really for cap good companies or can L&T continue to surprise everybody?
Prakash Diwan: No, we are in for a disappointment particularly given the fact that last quarter was a stellar performance and a very pleasant surprise which also by the way helped some of the key management functionaries get out at very high levels, but today if you see the kind of traction, that it has to rely on from the foreign shores, that is significantly higher than ever before and it is a company that actually delivers its services more offshore than domestically and till things improve domestically, I do not think it is a great market to be in with the competitiveness that you actually find. So margins are going to be under pressure even if the top line grows. So they managed to grow it in some way. There is disappointment very likely because the stock is still stubbornly in those higher zones which I do not think are going to be very easy to justify.
ET Now: What is it that you would recommend as an investment?
Prakash Diwan: The next area of focus from this new government is likely to be the oil and gas space and within that if they were to do something about rationalising gas supplies to the gas distributors and gas transporters, it will benefit some of these players who have been dominant for a while in operational scale up and by virtue of that, Gujarat State Petronet is one of stocks that I have chosen. It also has a fair smattering of some key holdings within companies like Gujarat Gas, GSPC which is unlisted arm and given its efficiency that it has clocked, any increase in top line is going to have a very direct impact on the bottom line. So you could probably see a re-rating of sorts once the gas issues get resolved. So you look at, be patient, wait for those things to happen, and you could see a 40-50% upside from where it is now.
ET Now: Anything else?
Prakash Diwan: On a more tactical basis, you can also look at M&M. I know it sounds boring, but M&M could probably start reflecting on its P&L, the improvement in the sales trajectory that we have seen in the last few months and my sense is that the sales trajectory would continue seeing some momentum. So once that starts percolating down to the P&L with their ability to pass on higher prices to the consumer, that is something which we are relying on and could probably come back to its earlier highs and probably cross over that given the fact that the group companies also have done well, namely Tech Mahindra, MHRIL and Mahindra Lifespaces.
ET Now: What is the sense that you are getting about the IT pack? Is it time to now profit book considering these stocks have done so well or do you think they still have momentum with them?
Prakash Diwan: No, it is a mixed bag of sorts. The fact is that Wipro came up with numbers that suddenly started seeming disappointing because it came after TCS and Tech Mahindra. So it is all relative at the end of the day and there is this likely churn that would again see a reinforcement of HCL Tech, TCS, Tech Mahindra’s supremacy compared to Infosys and Wipro. So the differential would keep on increasing. People are not happy to buy into IT companies at current multiples unless the growth rate is significantly higher and as demonstrated also. So I believe the punishment is going to be much more severe for weak numbers, but the momentum for some of the good stocks like Tech Mahindra and Hexaware would continue even into the current quarter.
ET Now: One, the insurance FDI and what does that mean for Reliance Capital and two, if you have looked at M&M Financial closely especially post the numbers?
Prakash Diwan: Yes, let me take M&M Financial first. Very clearly, something that was in the making for the last maybe more than just one quarter. So whatever we have seen cannot go wrong, things cannot go wrong in just one quarter to get these disappointments, but given the fact that the management is aware of the causes behind the shrinkage in names and the kind of impact that it has had on its margins means that they will be able to take some corrective steps on that and it could start offering great value once that clarity comes through. So I would rather wait and watch, but M&M cannot be written off so quickly, so easily with this disappointment.
On the FDI, very clearly it is benefiting Reliance Capital the maximum because of the kind of structure that it already holds with foreign partner that is more than willing to expand into the equity and we have seen historically the rates they have paid for getting into the business, I mean fairly higher than other companies. Disappointment was Bajaj Finserv which really did not benefit out of this entire thing because of this interlock of life and nonlife business together with the same partner and going forward, this whole hullabaloo around the insurance FDI will mean that we will not keep on seeing spikes in these companies and they would start having to get rated organically on whatever operating leverage they create. So by virtue of that, they will become much more long-term portfolio player picks rather than just tactical picks that all the time they have been.
ET Now: Biocon, Ipca Labs, Glenmark Pharma -- anything that is standing out?
Prakash Diwan: In fact, it is wonderful that Biocon has fallen in spite of okay numbers. If you read between the lines and also all the lines of the management commentary, very clearly it is a blockbuster in the making. You just have to be patient with it. So just go ahead and buy it during this week and I will start accumulating it for the longer-term multibagger story of sorts.
Prakash Diwan: The numbers have only ratified what people were always apprehensive about in terms of the stretch valuation that some of these tyre stocks had started enjoying, but if you look through the numbers of other companies in the space, one company that stands out very clearly, I will come back to CEAT of course, but JK Tyres for instance today is available at something like a 7.5 multiple of FY16 earnings and 9 times FY15 earnings. There is CEAT and the same token was in double digit, was actually double of this, was at 18. So there has to be rational and I do not think CEAT had any kind of product strength or product mix to back that also. So it has finally come where it deserves to be and I am sure it will continue to be quite weak for a while before the earnings pick up happens.
ET Now: Let us start with L&T. Can the results disappoint because things have really gotten off the ground really for cap good companies or can L&T continue to surprise everybody?
Prakash Diwan: No, we are in for a disappointment particularly given the fact that last quarter was a stellar performance and a very pleasant surprise which also by the way helped some of the key management functionaries get out at very high levels, but today if you see the kind of traction, that it has to rely on from the foreign shores, that is significantly higher than ever before and it is a company that actually delivers its services more offshore than domestically and till things improve domestically, I do not think it is a great market to be in with the competitiveness that you actually find. So margins are going to be under pressure even if the top line grows. So they managed to grow it in some way. There is disappointment very likely because the stock is still stubbornly in those higher zones which I do not think are going to be very easy to justify.
ET Now: What is it that you would recommend as an investment?
Prakash Diwan: The next area of focus from this new government is likely to be the oil and gas space and within that if they were to do something about rationalising gas supplies to the gas distributors and gas transporters, it will benefit some of these players who have been dominant for a while in operational scale up and by virtue of that, Gujarat State Petronet is one of stocks that I have chosen. It also has a fair smattering of some key holdings within companies like Gujarat Gas, GSPC which is unlisted arm and given its efficiency that it has clocked, any increase in top line is going to have a very direct impact on the bottom line. So you could probably see a re-rating of sorts once the gas issues get resolved. So you look at, be patient, wait for those things to happen, and you could see a 40-50% upside from where it is now.
ET Now: Anything else?
Prakash Diwan: On a more tactical basis, you can also look at M&M. I know it sounds boring, but M&M could probably start reflecting on its P&L, the improvement in the sales trajectory that we have seen in the last few months and my sense is that the sales trajectory would continue seeing some momentum. So once that starts percolating down to the P&L with their ability to pass on higher prices to the consumer, that is something which we are relying on and could probably come back to its earlier highs and probably cross over that given the fact that the group companies also have done well, namely Tech Mahindra, MHRIL and Mahindra Lifespaces.
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