Why Chakri Lokapriya is still not impressed by ITC

“In the case of the capital goods sector, this quarter is going to be very muted when they report earnings. The valuations are un-demanding and it is unlikely that they see any significant correction,” says Chakri Lokapriya, CIO & MD, TCG AMC


What is your view on the stock that everyone loves to hate – ITC? It has seen that up move kicking in. How are you looking at the individual businesses of the company performing? What do you expect shareholders to do?
There is nothing smoking hot about ITC right now. Its hotel business will pick up because of the unlock. Its FMCG business is in a steady state of growth. And its cigarette volumes are doing just fine and the gross margins of the cigarette business is some 80% odd. So one knows all the levers of the company in terms of where the additional growth surprise fundamentally for the business is going to come from. It is probably from the hotel business. Now the hotel business is not big enough in the overall scheme of ITC’s sum of the parts valuation, to take it significantly higher now unless there is some kind of corporate action within each of these divisions. Outside of that, it is one of the stocks which will do its thing but I do not see it fundamentally exciting.

Would you say that the semiconductor issue is getting a little graver than one thought?
Yes, it looks like that because the Ukraine Russia conflict has added a further spoke in the wheels of the supply chain. Supply chain costs continue to be a problem and the cost of the freight of various components have also gone up and the waiting time as a consequence of that is higher.

In the last three or four years, the volumes have been flat for the auto companies. So where is the volume growth going to come from? There is a waiting time even if there is some amount of demand revival. So we will not see volume growth and because of the high input cost pressures, margins are unlikely to expand. Finally, there is the EV push. But until these things settle down, it is unlikely to see any great surge. We need to see some kind of regulatory announcements on charging infrastructure, standardisation etc which will make rollout faster and allow higher growth estimates for the EV segment. There are pockets within – maybe Greaves Cotton, maybe a TVS Motors – which have a greater upside because of the EV but outside of that, mainstream auto volumes are largely going to be pretty much flat.

What is the expectation when it comes to the capital goods sector on earnings, execution, order pipelines as well as future growth?
Growth has remained muted for very logical reasons since they are coming out of the lockdown. There is worker shortage, supply chain issues and they are trying to see if there is some kind of stabilisation of costs.

Now some of their contracts are fixed price contracts and whatever was built in L1 for some of these contracts are actually not that viable anymore or probably barely viable in terms of margins. That means margin expansion is unlikely. So this quarter is likely going to be a very muted quarter when they report earnings, valuations are un-demanding. It is unlikely that they see any significant correction. And so unless we see a pickup in execution, there is unlikely to be a margin expansion in any case. The top line improvement is key to some kind of a pickup in longer term growth for these companies.

What about the power sector or the defence sector? The power sector is currently facing a lot of headwinds in terms of the supply side issues. But in the case of defence, finally the order inflows are coming in?
It is clearly very well placed whether it is Bharat Electronics or Bharat Earthmovers or HAL. Ail these companies’ order books look very strong. The valuations are never demanding and they are also entering into new aspects of business which will give higher margin IT related within technology, within the product offering and which will boost their margins also and improve their ROEs. All the names look very attractive and in this quarter, they are also likely to show good numbers.