Don’t see further downside for Hindalco, JSPL from current levels: Manish Sonthalia, Motilal Oswal AMC

In a chat with ET Now, Manish Sonthalia, SVP & Head-Equity PMS, Motilal Oswal AMC, shares his views on the Supreme Court’s verdict on coal-block allocation and its impact on the markets. Excerpts:

ET Now: The Supreme Court has called all the coal allocation illegal. Market reaction was swift. Metal, power and mining stocks corrected very sharply. Do you think yesterday’s market reaction in some of these power and mining stocks was overdone?

Manish Sonthalia: Not really. If you look at the verdict, it is impacting JSPLs, Hindalcos and Sesa Sterlites of the world the most. But if you look at some of the past valuations and ticker prices that you see of these stocks, I do not really think there is too much of downside from these levels even if you were to assume that the coal allocation was to be done away with or they will have to bear some penalties etc.

Let’s say at around Rs 255 on a JSPL or Rs 165 on an Hindalco and similarly on Sesa Sterlite, there is still a margin of safety that is available in these stocks. Of course, the Supreme Court has stopped short of de-allocating the coal blocks. Obviously, there is going to be some solution. I really do not think there is too much of downside in these names. Sentimentally, it could be that way, but fundamentally speaking, I do not really think there is too much of downside from current levels.

ET Now: So what becomes a buy at the current levels or are these stocks not a buy even now?

Manish Sonthalia: I would not venture out to buy these stocks because let’s first hear what is happening on 1st of September when the Supreme Court is to decide as to how you are going to regularise these coal allocations, and second of all, to have a finer account of how much of an impact it will have on the P&L and the balance sheets of most of these companies. So, give it a pause for the time being.

ET Now: Tell us more about how the conference’s day one panned out. We understand that Mr. Gadkari has wowed to add 2% from his own sector to the GDP.

Manish Sonthalia: Yes, you are right. He talked about investments adding up to 200 basis points on the GDP. One thing which he talked about was big impetus on highways and roads. He also wants the cement players to have a very reasonable pricing as far as the construction material for these road building is concerned because obviously, the cement players have increased prices post announcements.

It is going to have a bearing on the cost of making these roads. There is an intention to have a large allocation to the NHAI projects or the two-laning, four-laning etc., but cost of raw materials should be kept down. That was the crux of his speech that we heard yesterday.

ET Now: I will also like to draw your attention to the banking sector because the banking sector has a very large exposure to some of these power and power mining stocks. Currently, this sector is suffering because cash flows are not there and Supreme Court order will only intensify problems going forward?

Manish Sonthalia: Absolutely. First, you had the Supreme Court ruling that Adani Power, Tata Power are not allowed to raise tariffs. Then you have the Supreme Court judgment. I reiterate, this whole power sector is in such a big mess and surely the rub off impact is going to be there on public sector banks. They are already grappling with the lot of NPAs and there is no end to it.

We have to trade very cautiously as far as the investment into public sector banks is concerned. So clearly in the banking space it is the private sector that one should be focused on to.

ET Now: What have you made of the CCI penalty on some of the auto companies, the likes of M&M, Tata Motors, because they too have been finding favour as have been the auto ancillaries? In fact, auto ancillaries are the ones which are outperforming even the major auto companies. Does it dampen the spirit for them at all or would you continue to buy if you do get dips?

Manish Sonthalia: Going is very strong for the auto companies. So, this CCI order obviously is going to get challenged. That the announcement has come from CCI will not have much material impact. The order might get challenged all the way up till the apex court.

ET Now: An Edelweiss report this morning seems to be arguing that even if Hindalco has to buy coal at current market prices, the EBITDA impact could be about 5% to 7%. Going by that logic, is it a good time to buy into Hindalco which is not a power company, it is a metal company?

Manish Sonthalia: What everybody is building in is a 25% coal from the Mahan smelter as well as the Aditya smelter building into the FY16 numbers. The difference between the mine coal price as well as the market-linked price is going to be the impact on the EBITDA of Hindalco. The 6% to 7% impact on EBITDA is roughly a correct number and to that extent it is already getting built in a correction of around 8%-9% yesterday and even today.

I really do not think there is too much of a downside in the case of JSPL or Hindalco if you strictly go by fundamental and the impact that they would have on the P&L account as we speak today. What is going to happen on 1st of September we will take it up then, but as of now everything is there in the prices.

ET Now: I know that you own Tech Mahindra. You have liked the stock in the past, but at the current juncture closer to 2300-2400, is Tech Mahindra priced to perfection?

Manish Sonthalia: If you say that for the next six months to nine months, maybe yes. 2300-2400 may be a full price. But if you are looking at a slightly longer term, you will see telecom spending reviving on a global basis. The dollar revenue growth is going to be a bare minimum 15-16% with a propensity to get upgraded to 17-18%. EBIT margins will stay at around 15-16%.

I do not see a further negative surprise from what we saw in the last quarter numbers and valuations are very reasonable at around 13-14 PE. For a 25% plus ROE company available at a 13-14 PE and all segments of the business, particularly the telecom side of business, is starting to look up, which is roughly around 50% of the total revenue. Still maintain that Tech Mahindra has a long way to go on the upside.

ET Now: I want to get back to the conference. What is the mood like amongst investors? Are they getting a little sort of agitated now that the markets are already at their peaks, what happens next, some say lack of trigger, a lot of question marks being raised about what happens if the US actually increases interest rates, will India see an impact or do you think we are far too decoupled from it running on our own steam and this bull market is going to go on?

Manish Sonthalia: The mood is actually quite positive, but some rumblings of the BJP having lost the Bellary state were heard yesterday amongst the participants. Then you had the impact of the US tapering being felt in the end of third quarter or possibly the fourth quarter. At that point in time, maybe India would see some sort of a correction.

If you talk from the point of view of corporates, Hero MotoCorp sounded very optimistic when they talked about a 300 to 400 basis point increment on margins that they are looking to augment from what we saw at the end of FY14. The outlook from Bharti was equally upbeat as far as the revenue per minute and the data side of things are concerned.

50% latent demand on electricity we are short in our country and we have a whole lot of problems on the electricity front. So within the corporates, the mood is upbeat. As far as the investors are concerned, people are taking things in their stride. Nobody is really overtly worried about what is happening in Ukraine or Iraq, but some cautiousness is there. Possibly the emerging market as a whole is looking at a correction possibly in the fourth quarter or at the end of the third quarter.