Some stocks are closely linked to the crude oil price movement – energy, paint, oil marketing companies stocks. Given the kind of meltdown that we are seeing in global commodity prices crude included, what is your verdict?
In spite of crude going up and down, some of the companies like BPCL, HPCL are all trading at very low valuations. They are probably pricing in about a $50-60 crude price but those stocks are unlikely to see up move fundamentally because of the overhang of stake sale and the timing of that and the associated PSU discount.
In the case of Reliance Industries, the gross refining margins are going to be about $12 to $18 depending upon the type of the crude. Every $1 of GRM increase adds about 4-5% to EPS growth. So Reliance Industries is extremely well positioned. All its other businesses retail, telecom are doing well and its the good old bread and butter business – the refining business – that is going to show really good numbers in this quarter.
We were earlier discussing how we are seeing big trends as far as hiring is concerned from IT companies like TCS, Infosys, etc. What do you think could be the ripple effect of the same? Which are the industries or sectors that are likely to gain from the same?
All consumer discretionary related items including real estate in select pockets will continue to see strong growth. In IT, the reported attrition numbers are at about 20 odd percent and in the small and midcap companies it is probably about 30% plus. There have been instances where lower to mid-level employees have been given gifts like cars, bikes far in excess of actual annual salary count.
So this will reflect in terms of all the hotel companies like Mahindra Holidays,
. All these companies will do well. Second, for the consumer discretionary companies, it is going to be a hot summer like , Pizza Hut, Jubilant Foodworks all these companies will do well and so will some of the two-wheeler and four-wheeler companies.
There is a backlog, but the volumes are low and there is going to be a good amount of purchase of both two-wheelers and four-wheelers and whose valuations are very undemanding. So we will see this benefit of growth across various pockets.
What is your take on Reliance Industries because that stock has seen quite a bit of surge of late? Do you think more legs to the rally is possible?
Reliance Industries will do well because of the GRM that we just discussed, it gives an immediate earnings boost and this earnings boost fairly strong because Reliance Industries Jamnagar refinery is one of the most complex refineries in the world which means that it will have the highest margin amongst other refinery companies in India or even in Asia. Its profitability will be higher, demanding a higher multiple and second its regular businesses — the retail, telecom are doing well plus the new green energy business to which they are committing $10 plus billion is hugely undervalued. As more details become available, that provides a longer term leg of growth. Meanwhile stronger GRMs provide the shorter term leg of growth.
There is clearly a renewed optimism in the auto stocks of late. Everything from Bajaj Auto to Hero MotoCorp to an M&M are looking good. Now some of the tyre stocks are also picking up.
Indeed all these companies have been hit by auto and auto ancillaries because of high crude prices, Ukraine conflict, lockdowns and hopefully as far as the lockdowns are concerned, the opposite is happening. Crude has come off but still the conflict continues. But the volume for auto companies are at many-year lows. They are below even 2018 sales levels and probably at about 80-90% of what was sold in 2019.
In 2022, volumes wise they are far lower. Even if it was a low growing industry in line with inflation, the volumes must have been much higher assuming even a 5% inflation growth. But it has actually been below 2019 numbers. Against this backdrop, all the commodity costs, metal cost have held the sector back.
Now individual companies like Bajaj Auto, TVS Motors, Hero MotoCorp,
all these companies have extremely well defined electric vehicle programmes and so while on a short run, whenever the volumes pick up now, that will support the near term growth because EVs are still only less than 3-4% of overall sales. It is in its infancy and still regular petrol-diesel vehicles are the ones which will be sold for the next many years to come. If you look at multiples, TVS probably trades about 15-16 times, Bajaj Auto 14 times and Hero Motors trades at 10 times. These are at 40-50% discount to what they were trading at two-three years ago. Adjusting for lots of things. all these stocks – be it TVS Motors, Hero Motors which has corrected recently and Bajaj Auto – all will be a good 30-40% higher in a year’s time from now.