Deepak Shenoy on Bharti Airtel, LIC listing and the move in D-Mart

I think ARPUs would have gone up 20-25% in the last one and a half years. This is a great play going forward because it seems to be becoming a two-player game. Vodafone is not really investing or not really talking about how much more investment it can get. So Bharti is one of our positions. It is going to be a key position going forward. Debt is a challenge and we will have to figure out how much the interest rate changes impact it.

We will wait for commentary tomorrow before commenting on it more, but that is my biggest worry about how the interest rate changes impact the debt.

I am curious to know whether you are just sitting on cash or you have deployed it or begun deploying it in the recent decline?
One of our strategies is momentum, where it looks at the kind of momentum that is there in the market which seems to be going to cash. The algorithm is telling us to go more and more into cash but if you look at some of the fundamentals strategies we own, we have been actually adding a lot more in some of the stocks where we have had some conviction but the pricing was not so great at the time;

is one and we own it and so am quite biased. The results came in recently. They were terrible results but going forward, we see both construction equipment and tractors and their railways arm doing relatively better than earlier.

Also with the ownership now being with Kubota, there will be cancellation of two crore shares which is a little bit more than 10% of the company’s equity simply because it is owned by a trust which is owned by the company and one of the things that happened when Kubota took over was that this shareholding would get cancelled. So EPS goes up by a fair percentage just because of the cancellation of shares. I expect this company to do well. I am biased there but we are buying slowly and steadily over the next few months. We expect the markets to remain choppy and give us opportunities.

What else are you keeping on your watch list?
We are quite bullish on largecap IT. is one of our holdings. We are also adding a little more into banks. We have not been so much into banks in the last few years but this interest rate cycle seems to be very positive for the larger banks for two reasons; one is that the interest rate differential in short term. The ability of banks to park excess money at 4.4% whereas their SB rates are still 3.5% and that gives them a little bit better margin on CASA.

Earlier it used to be much lower in terms of margins. There is also a problem in the NBFC world which is turning a little bit topsy turvy. Lending over there will get more constrained because more regulations have started from April this year and a lot of that lending will start moving towards banks because if NBFCs were to be regulated as banks, they do not have the access to relatively cheaper capital as banks do.

The favour will go towards the banks and we are buying a few of the larger cap banks and not yet looking to venture in midcaps yet. These are the two broad sectors. We do have a bunch of others, a lot of corrections in the market. So, picking them piece by piece including Reliance. Reliance is a great buy at this price as well but too many stocks. So I will stop there.

Tomorrow will be one of those biggest listings in recent times. What should an investor do because the expectation is that listing might be a tad bit tepid?
I personally think this is a good stock to own for a longer term. Even with the public sector unit discount, it is reasonably under priced. There is a huge accounting change happening inside LIC and that change will be visible in the end of FY22’s results partially and FY23 results fully.

Some of that has to do with the way LIC was a mutualised company and did not have shares. So a lot of the policies were not really shareholder friendly because there were no shareholders. Now they have changed the policies to be more like what some of the other insurers do which is more common. So, the reported profits and what will be reported in subsequent years is going to be a fairly large jump even in FY22.

We might see a positive surprise when they eventually announce results and therefore I still think it is worth buying, if it were to be available at the IPO price or even below. One has to be sure of course that every market can take a 20-25% beating easily. If you cannot take that kind of volatility, this market is definitely not for you and perhaps the LIC IPO is not as well even after listing.

What is the outlook when it comes to the likes of Paytm, , or even Nazara Tech? Today came out with their operating updates that seem to be providing some sort of salvage to the stock. What is the general rule of thumb when it comes to looking at these companies?
I cannot comment about Paytm for other reasons but I think a lot of the players in this tech enabled space, are going to follow what has happened in the US which is an absolute beaten down profile for a lot of stocks. Whether it was Zomato or Nykaa, the same fears that are driving tech stocks down worldwide, are driving these stocks down as well.

In addition, the unlocking of post IPO shares which will probably happen for Zomato in July and for the others in November and so on will provide some more liquidity into the market in terms of people wanting to sell and that might be another pressure point for those shares.

However, these shares have to show drive towards profitability eventually because they are public now and have to be able to demonstrate that they can generate either by acquisitions or by themselves. The ability to generate positive, free cash flow is the idea about tech. If we generate a lot of cash flow, it will be largely free cash flow and that is why the Googles and the Facebooks are such popular companies.

It may take another couple of years before the Indian companies can demonstrate it so we might see some of these stocks languishing in the near term. But as they show results, we will be able to better appreciate how they are doing things and there are some non-cash items in some of their balance sheets, especially like Zomato’s where the Founder compensation in Esops hurts the profits.

Roughly half the losses come from Esops, which is a non-cash item. So they have to take that off and see how the business is really performing. I will wait for more data on this. However, I say proceed with caution. If you are not a long term investor, these stocks are not going to work really well for you. Play them on the technicals but it will take four-five years for the fundamental show through.

Curious to know what is it that you have made of Adani’s finally bagging the Holcim stake? What are your thoughts on a group like Adani betting on cement sector? That gives a hint of the kind of capex revival that we are going to see not today not tomorrow may be a few years down the line?
I sure hope so. We have been waiting for infra revival and a capex revival for so long and the problem really is that the capacity utilisation across the country is very low. It is not at the 80-82-83% levels which would require that capex to move on and with interest rates going up, I do not think people are going to put on large capex plans today. However, this acquisition may be more like a five-year thought process plus the fact that from regulatory reasons, it can happen now for whatever complex methodology is being used for their royalty calculations and so on.

It is more like they are starting to build a business where the cycle will really turn two, three, four years down the line. Of course, cement players are going to get extremely competitive. Hopefully, the cartel will be broken but given the history I do not have any hopes. But in general, this puts an end to all the speculation that has been happening over the years about who Holcim would sell to and whether it would or not and so on.

Finally we have got something going there but I think cement revival will only happen five years down the line and if you are playing the capex revival story, there are better players than cement to play with. I would just avoid the sector altogether right now.

What’s your take on the FMCG pack? The numbers were a tad bit tepid. How are you looking at that stock as well as the entire FMCG pack?
D-mart is an interesting story because it has very low real float. So, a little bit of news here can take it down 10% or up 10%. Typically it has gone up in the last two years but right now, the up move seems like a little bit overblown in terms of the fact that results were not that great and they have a lot of competition coming their way even in the physical store area.

Having said that, D-mart is a very strong story. Their margins are one of the highest among the retail players and if we were to look at the industry 10-years down the line, I think there will be a lot more D-Marts in India and much more household names than there are today. So it is a good stock but I do not know whether this is a great price to buy it.

Given where it is now, I probably would add a little bit overtime assuming that you can hold for a 10-year period but if you are looking at shorter term gains this might not play out fundamentally to your advantage. I think it will be a great play in the longer term.

As for the FMCG sector, the margin profile has been hurt heavily because of inflation, especially palm oils and so on for some FMCG companies. The next three quarters, we are going to see a rough situation on margins and therefore stock prices may not increase that much.

I would welcome a 50% correction in many of them because they are probably 2x overvalued but I do not think I am going to get that but still I do not think these are attractive prices to buy. I just think when the margins come down, the stock prices might hopefully follow and allow us to get an entry because we just want to own them at lower prices.