Chakri Lokapriya, Managing Partner, RSB LLP, says “as a sector, they will all benefit from the impending interest rate cuts that are going to come at some point in the next few months. We will see an increase in the discretionary income in the hands of the consumer. That means real estate as a sector will continue to do well. Lodha looks good. DLF looks okay. Sobha is still very strong.”

Reports are doing rounds that ITC might be looking at picking up stake in Prataap Snacks and on the account of that Prataap Snacks had gone up already 10-12% and ITC also moved 3%. Are these tuck-in acquisitions the way to go forward for companies like ITC?
Chakri Lokapriya: ITC’s FMCG ambitions have been well articulated over the years. They have organically benefitted from their cigarette business cash flows and putting them into businesses like FMCG. Inorganic acquisitions of Prataap Snacks, will give them a big exposure into the Indian snack and savouries industry.

Unlock Leadership Excellence with a Range of CXO Courses

Offering College Course Website
IIM Kozhikode IIMK Chief Product Officer Programme Visit
IIM Lucknow IIML Chief Executive Officer Programme Visit
IIM Lucknow IIML Chief Operations Officer Programme Visit

Now, Prataap Snacks is growing at about probably 10% and so that is a fairly healthy growth which allows and fits perfectly well with ITC’s distribution chain in the FMCG part of the business. So, at the current levels, if you buy it at about 2-2.5 times sales, that should be a fairly decent number. So, if it is true, then it seems to be a good fit.

We heard a lot of commentary from Mr Kumar Mangalam Birla today, but the one that really took the cake away was the fact when he laid out the three-year plan for paints business and said they are likely to hit the target revenue of Rs 10,000 crore within three years and become profitable. What does it mean for the incumbents?
Chakri Lokapriya: The big picture is India has the room to grow, the market itself, the pie itself to grow and therefore there can be room for more players. Now, Grasim is in, Indigo as well. Grasim has big plans and therefore will take a big market share, probably 30-40% market share in about three-four years’ time because they are going into this business not incrementally but in a big bang approach. Usually when a player comes in with scale and their existing cement businesses and adjacent businesses allow them the distribution reach to quickly match up.

So, if all this happens, it clearly will bring down margins for the other players like Asian Paints, the existing players like Kansai Nerolac, Berger, etc, and these guys are starting off from zero and their volumes will obviously go up very sharply. But overall profitability for the industry will come down. So, I will stay away from the incumbents like Asian Paints and Kansai Nerolac in this business.

You will stay away from the incumbent, but let me shift the focus and talk about Grasim itself. What value do you think the paints business can accrue because the market cap of Grasim right now is Rs 1.5 lakh crore. Do you think the paints business could become a meaningful portion of their SOTP going forward?
Chakri Lokapriya: If we look at anticipation of Grasim coming in, Asian Paints and other paint company stocks have not really done much in the last two or three years. Now that these guys have actually the plans are now up and running in six different locations, etc, and all that, a good amount of the valuation has already been built into the Grasim stock price as we see. As we see execution come in, volumes coming in of the paint business, I think incrementally the stock does well, but a meaningful upside just because of the paint business is unlikely because a good amount of it is already priced in.What is your view on this sector as a whole, is this something that is an investable idea where you still see value on the table and possibility of a bit of a turnaround?
Chakri Lokapriya: Airtel has done well as a stock over the last year or so. The spectrum auction that is coming up and the further expansion is still a bit away. The ARPUs are likely to move up a little bit more, which is good news. But I think incrementally the stock does well, but the big runs in the stock is kind of pretty much in the price.What are your thoughts on the real estate space because all these stocks have been buzzing, Oberoi Realty, Godrej, DLF. In recent times, they have seen a good runup. What is the view now on these stocks or as a sector as a whole as well?
Chakri Lokapriya: As a sector, they will all benefit from the impending interest rate cuts that are going to come at some point in the next few months. Once the US knows where it is going in terms of interest rates and kind of plateaus out and starts cutting, then that will see an immediate pass through because the way banks have the home loans, EMI structured is as repo rates are cut, that chunk is immediately kind of passed on to the consumer. So, the RBI stepped up in the run up to hikes in the last one-and-a-half years.

In the same way there will be a step down as well which means we will see an increase in the discretionary income in the hands of the consumer. That means real estate as a sector will continue to do well. Lodha looks good. DLF looks okay. Sobha is still very strong.

In fact, Ethos reminds me of this entire luxury and affluent India demand that we were talking about last year. It is time that it is going to get extended to the masses as well because this morning Sula was in the news on account of certain changes in the regulation. Ethos right now is up 7%. What is your view on mass versus affluent right now?
Chakri Lokapriya: The mass versus affluent. Affluent has clearly done well and will continue to do well. The stocks associated with that, like Indian Hotels, Chalet Hotels, have all performed very well. Now, as we move slightly down the chain, if you look at a company like Apeejay Surrendra Park Hotels, they have both the boutique luxury as well as the affluent. This company, well-priced, attractive, shares the same fundamentals as the hotel industry and its balance sheet, is strong, which means there are enough companies in the broader market, in the mass-affluent segment which will do well.

What do you think is the level to watch out for this year because a lot of people were saying that there are no fresh triggers for the market and the bulk of the rally is something that we have already seen and probably expect only a low single-digit or mid-single-digit kind of growth from Indian markets this year. Do you think it is incorrect and we are likely to head to at least 24,000-25,000 soon?
Chakri Lokapriya: The market is likely to head much higher than that for the reason that if you look at the earnings in this quarter, they basically grew somewhere between 17% and 20%. And going into the September quarter, because you have an election in between, in the September quarter, it is very likely that the earnings will be revised up at the index level and also therefore, obviously, at individual stock levels.

Now, the market itself, the index is trading at about 18-19 times on 25-26. So, with an earnings revision upward, it provides further momentum, earnings momentum translates into stock price momentum and therefore the returns should be much higher than that as we head towards the end of 2024.

But on Thursday what I am looking at as very exciting is Nifty IT. It is managing to hold on to good gains there, HCL Tech, TCS, saw a good jump up there as well. What is the view on the IT pack? We have seen some of these midcap IT in a move, but the largecaps had not been participating for a while. Now change is coming in and fundamentally also we could start expecting these companies to do better?
Chakri Lokapriya: With Nvidia raising its numbers by 10% after such a strong quarter, you will see some trickle down benefits for the Indian IT services company and implementing in some of the AI projects that various companies are going about in the US and elsewhere in the main markets of the Indian IT services. That momentum is kind of what is reflected in the stock price today, in stock prices of the IT companies.

In terms of fundamentals, they are fine, but the real business momentum we will see order book coming back, that is probably still a quarter away because the US market is still grappling with whether US has hit a peak or not and that drives the IT sector cost of capital.

(You can now subscribe to our ETMarkets WhatsApp channel)


Source link