BPCL has been sensitive to the news on the privatisation agenda. Energy as a basket and PSUs have been in focus. What could be the potential opportunities there?
Energy has rebounded because of new found optimism as the rollout of Covid vaccines has started. Against that backdrop, there is Reliance Industries (RIL), which is now a brand new company with multiple legs of growth and that remains a real play. As long as there is a buyback in HPCL and the privatisation move gathers momentum in BPCL, we will rerate its valuations because it has been on the burner for quite a long time now. From that perspective, probably HPCL and Reliance Industries have a greater momentum at this point of time.
Where are you seeing value now?
Getting a vaccine is now the new high. By May or June of 2021, a good 80% of the US population will be vaccinated. Germany, Singapore will roll out the vaccine on an accelerated basis. This will super charge consumer confidence, corporate confidence and also the stimulus behind the government provide the stimulus. Against this backdrop, we think the rotation will still be into consumers. You have to be pickier about consumer stocks now. It has to be auto ancillaries versus auto consumers, bigger ticket consumer durable versus smaller ticket consumer durables. Mini rotations are now in play and we will see more of that in coming weeks and months.
What is the cash composition? Are you using market strength to your advantage to raise more cash?
We are not raising cash, we are rotating with subscriptions. The cash levels are hardly about 2%. The minute we get any subscriptions, it is being immediately deployed into the market. We are deploying it in some of the bombed-out PSUs with new found rotation into them and those are more positional trades. Both Sun TV and Zee TV are very inexpensive stocks and we also have new legs of growth like OTT which can contribute to future growth for both of them. We are trying to find new pockets of growth and cash levels are very low.
How are you manoeuvring the oil and gas space? Are there any worthy investments in there?
Thanks to the rebound, the oil and gas space will increasingly come back in the coming months. Getting a vaccine will be a new high. By June 2021, 80% of the people will get vaccinated in the US and it will coincide with the US driving season, the biggest driver for oil prices. Now that bodes well for a whole bunch of refining companies as the refining margins will expand quite dramatically and year-over-year comparisons will look very strong.
Against this backdrop, BPCL has other expectations. It is not just a business expectation. So that timeline is unknown. HPCL on the other hand is an easier trade. The stock is unloved. It has underperformed and business momentum will pick up for HPCL. Valuations are on its side and that will help HPCL and Reliance Industries. In addition, other businesses like retail, Tata Communications are all doing really well/ Now refining will provide an additional leg of growth.
What about PSU banks? Are you relooking at some of the stories there?
That is a good question and the last time we spoke about Canara Bank and it is up over 30% since then. If you look back, PSU banks as a story is one of a crisis of confidence. That confidence is because of the uncertainty over whether they will or will not be able to raise capital and shore up their balance sheets and increase their provisions. Now Canara Bank raised about Rs 2,000 odd crore and demand was much more.
The company is using it to shore up all this, shore up its provisioning, releasing growth capital. This means that fear of whether it will be able to raise capital is now coming down. The same is ringing true for Punjab National Bank (PNB) which is also going to do a QIP and a large one at that.
There are a couple of other PSU banks which also plan to raise capital. And one thing that all of them share in common is extremely low valuations — 0.3 times, 0.2 times book value. Even after the run up. Canara Bank is trading at 0.3 times and Union Bank at similar numbers. That way, you have a good positional trade in the names like Union Bank, Canara Bank, PNB, LIC Housing and in the NBFC space.
Would it still be the majors ICICI, Axis, Kotak? How would you stack them up given the kind of run up we have also seen across some of them?
While Kotak and the HDFC Bank clearly will remain darlings in terms of outperformance, the stocks are unlikely to outperform in the near term. HDFC Bank still trades very close to its traditional multiples and so does Kotak. Therefore within financials, beaten down names like Federal Bank trades at 0.6 times book, LIC Housing NBFCs trades at extremely low multiples.
The huge unloved financial services companies — both banks and NBFCs — are the place where we are putting our money to work.
Last week, the defensives like ITC, Nestle made a comeback. Could it be considered an indication of what markets are thinking?
Yes, ITC has underperformed for other reasons like the SUUTI overhang, some concern over its cigarette volume growth during the lockdown etc and it is making a comeback. Nestle did its initial bit during the lockdown. It benefited from people sitting at home and eating biscuits and chocolates. There is a certain amount of rotation within those sectors. So, even companies like Marico will continue to do well and the holiday season will help in some amount of additional growth as well.
After that blockbuster listing, Burger King has become the best IPO this year, going up 130%. Do you profit take after the big listing pop because the valuations are in a different orbit altogether?
Absolutely yes. The rollout plans of Burger King will provide huge legs of growth in terms of positive news flows. It is trading at a multiple which is higher than Jubilant and Westlife but given that it was such a small offering in size, there is a good amount of money chasing and so you will have those kinds of positional trade still left in the stock. It is more than fairly valued at this point of time.