In an interview with ET Now, Rahul Singh, Managing Partner, Ampersand Investment Advisors LLP, says this is going to be an up-and-down kind of a year but fundamentally sound companies will continue to deliver and go up through these corrections.
Edited excerpts:
Do you think we should brace ourselves for a 4%-5% correction?
A 4-5% correction is difficult to time and sales is going to be 4%-5% or 2-3%, but obviously, the markets have had a good bounce-back. This year is going to be an up-and-down kind of a year but fundamentally sound companies still continue to deliver and continue to go up through these corrections.
You have seen companies making higher highs despite the corrections in the market. We would not really bother about calling for a 2-3% or 4-5% correction, which could or could not happen.
Having said that, obviously, the stocks and the individual stocks and sectors are looking a little toppish right now, given that most of the good results are not leading to stocks going up. You would see a followup of that as some kind of a minor correction in due course.
We also have the Karnataka elections coming up. There could be some nervousness which could prove to be a trigger. Essentially, these events are just triggers for the nervousness to manifest itself in some kind of a correction.
Even though the aviation sector is growing at a very smart rate of 20% plus on a large base, aviation companies will be dependent on crude to generate future business and maintain margins. What is your view on the sector?
As a general statement, that is correct. What has been surprising in Indigos results and the subsequent commentary is that despite the demand environment being quite strong in the fourth quarter, partly led by lower prices, the pricing power or the pricing discipline in the industry has been somewhat absent. That is disappointing to say the least because typically capacity utilisations in the industry is over 90%. Even for Indigo, it was 90% in February-March.
You would not have expected the kind of yield pressure which Indigo spoke about in their post earnings commentary. So, overall, it is disappointing. Having said that, from a long-term point of view, Indigo does have a lowest cost kind of structure.
Overall, this pricing discipline has its ups and downs but given that now even if the pricing power were to come back in the busy season, that is May and June, the crude prices have rallied almost 10% from last quarters average. SO, it will barely take out the cost pressure which will be there in the June quarter even if the yields go up.
All in all, next three to six months may not be that exciting for the sector because for pricing discipline to come back big time, you would have to wait longer. Essentially, it will remain a trading stock in that time zone even though the long-term prospects for aviation as well as Indigo remains fairly decent.
What is it that you are hoping to hear from a PVR given the long build up in the stock of late? This has really been one of those prime urban consumption stories which has been a darling of the markets. Do you think that the earnings will be able to match up to the kind of stock performance that we have seen from PVR whch is already at a life high and skirting around that?
The earnings of PVR actually have not been great these last few quarters. They were nowhere near the valuation which demands a higher kind of earnings trajectory in PVR.
What the market would be looking forward to is their commentary on the content. Essentially it is becoming clearer that it is a content play and not just a play on urban consumption. The content — whether it is a hit or a flop — also decides the quarterly earnings trajectory for PVR. So, it has become a little difficult to predict earnings with any degree of certainty.
Plus, various state governments have been talking about putting a cap on the F&B within the premises of these multiplexes. So, some amount of risk has also entered the earnings. All in all, it is very difficult one to pick at this price and say with any degree of certainty that irrespective of how well it is going, we would probably stay away from such a name where the earnings projections are very difficult and not dependent on the company per se.
The market positioning on cement is divided. Do you like cement stocks? If yes, which one?
Yes, we like cement. We like the fact that the demand growth next year is going to pick up. We have had some delays in the pricing uptick this season but that is not to say that the pricing uptick will not happen. The cost has peaked. It is not going to go up much. Any pricing increase will flow down to EBITDA.
We like some of the mid-size companies though they are hardly midsize any more. We like Dalmia Bharat.
Barring the yes and no which keeps happening on the Binani issue, fundamentally the company looks very well placed and the valuation is also much more reasonable compared to the top names which are trading at 15-16 times EV/EBITDA.
Dalmia is more reasonable at 11-12 times EV/EBITDA and that is one name where we can clearly put our money where the mouth is.
Give a list of midcap names where one could go for a buy for next 2-4 years. Retail banks and NBFCs are crowded names. But frankly, your edge as an investor has to be in some of these outstanding midcap businesses where you see visibility for next 2-4 years.
Yes, NBFCs and retail banks are a crowded space but within that, there are some companies which are doing well and showing signs of turnaround .
Equitas, for example, has changed its business mix quite dramatically last one year and the costs have stabilised. So, you are seeing operating leverage kick in there and that is one name which stands out.
Housing finance companies continue to do well. We also like cement as I mentioned. We like the theme around construction and will continue to like Dilip Buildcon although it has run up and it has become more of an annuity return from here on. But the company is still doing very well and on a very strong wicket in terms of showing year on year earnings and order book performance. This is just a sample of some of the names which we like in the midcap space.
What about the correction that one is seeing in the high beta pockets like Jet Airways, HCC, HDIL etc.? Is it time to get a little wary of these high leveraged, high beta names?
To be very frank, we have not really been in that segment and we have not really tracked that closely because lot of these movements are happening due to external events. Some of the high beta names are also moving, as are the names which are undergoing NCLT proceedings.
In case of a correction, it is the high beta names which will correct the most. Typically, you would see the breadth narrowing in the market and we are already seeing some signs of that.
In the last two days, the market breadth has narrowed and it could narrow considerably even if the market moves sideways. I do not think it is time to jump into these names because they have bounced back quite hard from the bottoms in Feb-March.
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ET Markets
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