Very positive on Bharti Airtel, use dips to accumulate stock: Dipan Mehta

‘Telecom is one industry which is able to maintain its present earnings power’

There is valuation comfort and a decent amount of margin of safety in the large-cap banks, says Founder & Director, Elixir Equities.

Let us start with banks. It is quite confusing. On one side, banks are losing the charm with institutional investors but when a Kotak QIP hits the market, it gets massively oversubscribed. The Economic Times today is reporting that Carlyle could be looking at investing in Axis Bank. One one side you have long-term investors who are saying we find value in these banks, but on the other side, the stock performance or traders or perhaps positional investors are telling you that we hate banks and they are selling on every uptick.

Yes, I think the investors who are buying banks right now are taking a two-three-year view. Even the bankers themselves do not know the impact of the lockdown it will have on their NPAs and that is why the stock market, which is typically focussed on next one or two quarter earnings, is avoiding banks stocks. However, long-term deep pocket investors who have faith in India know that eventually banks have to do well if you want to believe the India story.

Also, just as consolidation has taken place in many sectors and was ongoing within the banking sector post IL&FS crisis, that entire process will only get further speeded up in this post-lockdown scenario where the stronger banks will be able to get even more stronger and get higher market share. That is why the prospects of most private sector banks which have got capital on their books, good management and very sound underwriting capability will be able to again go back to that growth rates of mid-double digits or 12-15% type of growth as seen in the past. That is why banks are being preferred by long-term investors. There is also valuation comfort and there is a decent amount of margin of safety in the large-cap banks.

Why is ICICI Bank completely getting hammered out of shape? Are markets forgetting that ICICI Bank also has some great subsidiaries which are doing fine; whether it is the insurance business or the securities business or the AMC business?
I do not have a precise explanation why a particular bank is not doing as well as the others. Today ICICI Bank is underperforming; a few weeks earlier, it was Axis Bank and before that it was IndusInd Bank and it could be HDFC Bank’s turn next time. These stocks are owned very heavily by institutions and if one or two large institutions decide to get out of the stock, you could see an underperformance.

But by and large, the prospects of Axis, ICICI, IndusInd to an extent are more or less similar. If you want a little bit of more safety, then you have Kotak Mahindra Bank and HDFC Bank. But by and large, the banking industry does tend to do well or badly as a group. So I do not have a precise explanation for why ICICI Bank is underperforming but my medium- to long-term outlook on ICICI Bank is definitely positive. I do agree with you that there is a lot of value in subsidiaries listed and unlisted which is not being completely captured in the case of ICICI Bank.

You have Dabur and USL reporting their numbers today. Anything in particular that you would be looking out for? Of course, the whole buzz of delisting has kept the USL stock rather warm of late and this has been one of the first wherein the online delivery platform has worked and we have already seen online delivery of liquor kickstart in many states?
There is not much interest in the quarter which has gone by because that only had a couple of weeks of the lockdown and to that extent, it is not a reflection of other future prospects of the company. In all the conference calls that I have attended so far, analysts are focusing on the present times that the company is going through and how they see the demand post gradual lifting up of the lockdown and return to normalcy. They want to understand consumer behaviour and consumer demand and whether it is holding up or there is a drop in the sentiment.

So in these two companies as well, investors will try to figure out how much the damage has been on account of this Covid-19 pandemic and it is not damage in terms of the pure financials because both these companies are extremely strong in terms of their balance sheet and can withstand such shocks. But it is more to do with future growth rates and whether those can be sustained. As we have seen in the past, we should be lowering our expectations when it comes to top line and bottom line growth for these companies.

Also, I think a lot of discussion is about the exact roadmap for opening up of their operations. The operations which have already opened up, there we are seeing a lot of questions being asked on what percentage of capacity utilisation is the company operating at this point of time. So it is more to do with the present working environment and less to do with the quarter which has gone by.

I would also like to add that a lot of the companies that have come out with the results so far have said that January and February were excellent months. I think we were on the cusp of a nice recovery in corporate earnings before this pandemic hit us. Now all that is out of the window and one really needs to reassess the exact position of the consumer demand and financial profits post return to normalcy.

How would you approach Bharti? The promoter selling would keep the stock under pressure. Should one buy on these dips?

The promoter selling is over and done with. So I would not expect it to be a recurring phenomena because of which the stock would be pressured. Sure, we had a down day for Bharti and it is not unusual given the kind of fantastic rise that it has given us. Going forward, it will remain an outperformer and the results were quite impressive, especially the way the yields have improved and the target that the company has in terms of raising its ARPUs as well. We are very positive on Bharti Airtel and I think that it should be part of most core holdings and corrections that what we saw can be used by investors to gradually add Bharti Airtel.

This time around, what we noticed in the investor release and the presentation was a lot more discussion on some of the other digital initiatives which the company has taken and gradually value has been built over there. By and large you have to admire that the company handled the Supreme Court AGR crisis pretty well and in a situation like this, where most businesses are floundering, telecom is one industry which is holding up pretty well and at least being able to maintain and sustain its present earnings power.

What is your take on Reliance from here? Is it still a good time to buy?
As we discussed about Bharti Airtel, Reliance is more and more about Jio platforms than just about its refining and retail businesses and given the kind of concentration it has in the Sensex and the Nifty, investors need to have Reliance in their portfolio to at least match the returns of the Sensex and Nifty. This move on the part of the company to list it overseas is a right move because listing it in India would mean that there would be an additional discount on the holding company valuation. But by listing it abroad, at least for the Indian investors, the only way to own Reliance Jio would be through Reliance Industries and that would keep the interest alive in Reliance Industries.

At a time when most businesses are having difficulty in terms of raising capital or growing the business, we have one company over here which has prospered and thrived in this time of difficulty. My sense is that once the pandemic is over and done with, it may do even better. I think it is a great time for Reliance Industries in the next two, three years or so and it depends a lot on the company being able to fulfil its strategy outside of the telecom and the digital products. But given their track record, investors have a high degree of confidence in the management. So I think corrections, whenever they do come, are good opportunities to buy into Reliance Industries and some of the investors could also look at getting into the stock by buying the renunciation, which may be at a slight premium but does offer a simpler and more easier payment plan. So for the same value, you could end up buying more shares than committing to invest gradually as the calls are being called.