Some monopoly groups like Adani, Ambani are sitting on an ecosystem which allows them to consolidate and buy out assets but the rest of India is deleveraging and saying stay off business, says the CEO, Dimensions Corporate Finance.What is your sense when it comes to some of the key banking names?ICICI Bank has sold 2% in ICICI Securities. It tells us the bank is going to keep divesting off its subsidiaries and booking profits. If they are selling off ICICI Securities to book profits, obviously there is a dollop of bad debts or at least provisions coming their way. So to that extent, the market has now started to value some of the companies like SBI and ICICI. Given the subsidiary value, whatever it is, your bank’s intrinsic value is next to nothing or at least was next to nothing. The fact that ICICI is divesting, means that monetisation can happen and therefore there is a cushion for the bank. So there are a) intrinsically strong banks and b) Banks like ICICI, SBI which have got subsidiaries and c) a whole bunch of smaller banks. That is where you pick and choose. But is it the time to go into smaller banks? I guess not. Is there arbitrage for the PSU banks? Perhaps yes, in a bank like SBI. And there can be ICICI, HDFC banks in the portfolio. One can now safely argue the fact that possibly the rerating of some of the banks with good quality subsidiaries is taking place at this point of time and that is leading the charge. IndusInd has gone down so much that there is only one way but up. I guess that is what is happening in IndusInd. What are you making of the entire online grocery business with the Reliance-Future deal? What happens to Avenue Supermart? Reliance is now 2.5 times larger than DMart?I always have believed and I have lost on that. DMart was always an expensive stock; so leave alone the fundamentals, the stock is fairly expensive but I believe that their business model would survive. How long this continues, I do not know. I do not think it is going to be one monolith charging the whole system. There will be competition at that point of time. Secondly, other than DMart, we have got other players like Big Basket coming into the place unless they also get sold off. There is Amazon. So, it is going to be a competitive space. There will be a short-term bump. You have got market share and so on but it is not going to be an easy game to make money because there are going to be three to four strong players in the market and sooner or later whether this Monopoly Restrictive Act kicks in, we will see what who can access, what kind of an area or a geographical monopoly. I would not say it is a great negative for DMart because rationalisation of stores will take place when Reliance takes over and therefore they might face less competition rather than more competition. The number of players has gone down. One big player is out of the game and that is always a great positive for the existing players. At first there were three, and now there are two apart from Amazon and others. So to me, it is an advantage for DMart that now one player is less in the market and the good part is that player was struggling the most. He had the highest motivation to discount the transactions. Although Reliance is known to do it with telecom but in a market with two or three players, you can get more money than a market with five players. So overall, I remain positive on DMart as there is one player out of the system. Have you been a buyer since our last interaction? Do any spaces look interesting?As I said, our only focus has been on the banks. We thought the banks had breached a point where they were valued at next to nothing and that play has done well. Apart from that, I do not think we have increased our commitments in the market at this point of time. No matter how the buoyancy works, I am not in a mood to put more capital in the market, given what is happening in the economy. Yes, there are FII flows but it was there the last time when the Nifty reached 12200 and you saw what happened. So we are a little bit on the sceptical side, maybe in a minority, but certainly not committing more capital than what we had in the market last week. I do not think we will be doing it this week. What is stopping you back from committing more capital? Is it pure vertigo or do you think that there is a froth there?Well, I do not know how to answer this but I would say that after having worked so much in the market, you get a sense when it is time to go big in the market and when it is time to hold your hand. Something tells me that it is a good time to hold the hand and see how it goes. Yes, you can miss out on some upside in the market but that is all par for the course. If you put in context what is happening, petrol is at Rs 84 a litre in India, diesel around the same price, inflation is where it is going at this point of time, the gilt yields and the economy with all the daily rising Covid cases. Somewhere down the line, it got to give and the first signal in the market is coming from what is happening in the consumer stocks. There is absolute zero buoyancy in the consumer stocks. If the rural economy and everything has to move, you should see more buoyancy in the Nestles, Unilevers of the world. Maybe it is investor fatigue, maybe it is realising the reality on the ground. I do not know which one it is but signals are that this is not a market which has got a ground up support at this point of time. You saw the GST issue playing out between states and centre. So if you put all that in one bucket, put FII inflows in the other bucket, I would tend to believe that caution could be the order of the day although in the past month or so caution has not played up. Let us be honest about it but six different items playing on the economy at the same time, including the state and GST, FII flows on one side, well you can pick and choose which side you want to be. Another point is nobody is out of the market. So, you may not make the penny last extra from the market but as March and April showed, keeping money on the side got you a phenomenal dividend at that point of time. People who were fully committed, could not get the best of the rally. People who were in cash could get the better part of the rally. So well discretion makes sense. Maybe you walk away with less money but at least you sleep safely. Adani is buying GVK’s Mumbai airport business. A balance sheet repair is also happening in Shapoorji Pallonji Group and some other real estate builders. If the balance sheet repair cycle has started in large accounts, then perhaps things would be very very different?Corporate banks have a challenge and the challenge is that most companies want to deleverage. You are left with working capital borrowings which is also exposed to the commercial paper market. The quantum of people who want to borrow money itself is going to be a little bit of a problem now for the next year or two. The only good part is that now people are not bothering so much overseas. They are more bent on Indian borrowings. Second, from the economy standpoint, deleveraging in such a large magnitude is a worrying trend. It is never good for the economy because that is not what we want to do in a company which is expected to grow. Third, for the shareholders, a zero debt structure is the worst structure possible. Sure you must celebrate a Reliance zero debt alternative but in terms of pure WACC cost to equity, whatever way you work it out, if you are zero leveraged, that is not the best way to manage the capital of the company at this point of time. So no company is going to bet on growth, we all want to play safe with equity, we all want to sell off assets and pay off the banks. At the end of the day, that is what is happening when you say balance sheet repair is going on. Therefore who is going to bet on the economy? Where is the growth going to come from? How can the state government and central government keep spending money? So the driving point is why is deleveraging taking place? It is because the economic environment is not supportive enough to even earn the rate of return equal to debt interest, which is one of the lowest in the decade and repay the loan. Now if a corporate does not believe that it can make 8% rate of return to repay the debt at that point of time, then the assumption is to be based on the economy. That is why we say caution. We have seen no new projects. People are not willing to bet on borrowing and that shows you exactly where on the ground the economy is headed and why nobody is willing to take a chance. Sure there will be some monopoly groups like Adani, Ambani etc. who are sitting on an ecosystem which allows them to consolidate and buy out assets but that is not really India. The rest of India is deleveraging and saying stay off business. In fact smaller MSMEs do not want to invest money. We have got so many people calling in to put money in the stock market and saying I do not want to put money in my business, let me put in money in somebody else’s business now. The other pocket which really has sprung off late is the entire larger theme of consumption be it your Indian Hotels, Jubilant Foodworks some bits and starts moves in a PVR. Aviation is getting back to its feet. Anything which you would like to keep on your radar?There is only one sector which has a quasi monopoly status which is the multiplex sector. Now if you have a longer horizon, you got to be there because you cannot have multiple players coming in. There is no competition, the malls do not come overnight and given what has happened to the economy, we doubt very many new malls will come in for the next couple of years. Whoever is sitting on prime real estate is going to make big ticket money at that point of time. Whether it is going to happen this year, next year or at some point of time, you will start to live your life and start to go to movies. Sure, it could be a hard climb but they have a monopoly on the entertainment sector, at least out of the home entertainment sector and cannot be substituted. Among all the sectors, I would say multiplex in India is definitely the best place to be for the longer term. You got to ignore 2020, as Americans say cancel out 2020. But that is one sector where you would like to focus yourself. All others are highly competitive sectors with no history of returns. Commodities also are seeing a very strong comeback – be it metals, tea, coffee, sugar. Is this a trend which one needs to keep on our radar and perhaps invest in as well?We have a large holding in commodities. We have a large holding in aluminium and iron ore. Both prices have climbed up but the key here is if you are an investor, you will not invest based on what the price to the share is. If you are willing to commit yourself to monitoring the prices of aluminium, iron ore, zinc, silver every day, then these stocks can give excellent dividends but you need to watch the economic cycles. We saw the devastation of NMDC, Nalco, Vedanta etc. at the height of the pandemic. These stocks perhaps are driven more by FII flows in the economy. In the longer term, you cannot go wrong in commodity stocks and the good part is they give you dividends. These are not the kind of momentum stocks which traders love, but fundamentally a very good place to be if the government policy continues.
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