value investing: has the market mood shifted in favor of deep value stocks? Chakri Lokapriya responds
Tata Motors has performed well over the past year, but the rest of the auto industry has underperformed and we are seeing a turnover in the industry. Wage increases in Indian companies are north of 10% and some industries like IT, pharmaceuticals and chemicals are granting larger increases. It gives people confidence to buy cars and ratings are undemanding. In addition, exports are maintained. Automobiles will be doing well as the holiday season approaches.
Should investors add or re-buy in real estate names?
Real estate is a very location and region specific investment. Sobha and Prestige are largely in and around Bangalore, where the IT industry is thriving, wages are rising and new jobs are added. This creates demand and there is a huge amount of unsold inventory from all of the real estate companies. This creates an easing of cash flow for real estate companies. I think this trend will continue. It’s region specific and in some stocks like Prestige even after that there is still some uplift.
Would you recommend investing in one of the power companies? Tata Power is your favorite?
Yes Tata Power as well as NTPC – those two names continue to look good. NTPC is probably trading at 1.1 times the pound, which is an all-time low from its own multiple over the past several years. This is because of the low plant load factor currently and as it increases it will increase operating leverage. We haven’t even talked about the reforms that can take place in this sector. Demand is coming back and valuations are undemanding.
Tata Power also has access to coal. Indonesian coal is slightly more expensive, but it can be used to be traded in the global market for Tata Power. These companies are therefore well positioned. There is still a 20-30% increase in each of these titles.
What do you recommend investors do in Bharti, offer the rights?
Absolutely yes. Currently, the rights are probably trading in line with the spot market price and looking ahead, until such time as the rights issue is closed, from that point on, these levels debt will fall and ARPU is expected to rise.
By then, we would have a more favorable outlook on the prices for using 5G spectrum and therefore right-wing subscribers will buy it at an attractive price, when they buy in different tranches. So trading the rights as well as subscribing to the rights looks very appealing.
Even though we are in a bull run, caution is setting in. Is it time to shift the portfolio towards high value stocks? Do you feel this change in mood?
Right now we are seeing a return to normal in India. The economy is starting to revive, the unblocking is taking place and therefore whether it is hotel companies like Chalet, Indian Hotels or Thomas Cook, all of them are certainly seeing a lot of reservations. When they reported the next quarter, you would see some really solid numbers. Now is this one off? I don’t think so because it’s okay for people to go on vacation, it’s okay for people to go to a retail store, it’s okay for people to go to a Bata store.
But the schools have been closed for two years. It was not necessary to buy new school shoes. Now the schools are reopening and normal growth is returning. On top of that, every business has realized that they can sell things online, they can lower their costs, and their margins will improve. I think this will continue and help improve margins. We will need to identify the next beneficiary as India unlocks.
Does it make sense to add positions to one of the gold financiers?
Gold prices in rupees have remained largely stable over the past year. A person who comes in to borrow from Muthoot or Mannapuram is a small business; he needs money to restart his business. The unlock is happening and so he or she starts to see companies coming back and as a result he promises gold and is happy that gold prices have remained stable.
As for the company, it sells a very secure loan. As long as gold remains stable, their loan-to-value ratio, their NPAs remain under control and valuations are absolutely correct. Mannapuram is probably cheaper than Muthoot. As India unblocks and the demand for credit increases, gold pledging by the small entrepreneur increases, Muthoot and Mannapuram will do well.