Let us start off by getting in your take then on Asian Paints. How would you decode the quarterly numbers because it has been a bit of a miss this time around? Do you think that when we see price hikes kick in in the coming quarters that things should stabilise or improve?
Sandip Sabharwal: Yes, this entire paint sector is very similar to the cement sector in a way where companies continuously announce that they are increasing prices, but due to competitive intensity those prices actually do not go down to the retail level and then cost pressures lead to profitability pressures.
Cement obviously benefited due to low fuel prices, etc, so they are sustaining the profitability. But in paints, like I have mentioned for the last three years, once Grasim becomes aggressive and once their products actually come into the market and they start pushing it because of the huge investments they have made in the paint segment, we will see margins getting squeezed for the existing players, so that started now.
It could last for at least 12 to 18 months till the point of time Birla Opus actually gains a reasonable market share. And at that time, the pricing pressures could reduce and that might be the time when we get good opportunities to buy into paint sector.
So, I would think that right now, overall sector is avoid and Asian Paints especially has seen the most pressure on margins actually from all the results of paint companies that have come in and to that extent the valuations post results become even more excessive than they were prior to the results.
What is the view on pharma because today, of course, three or four stocks are going to be in focus. You had a bit of a weak set of earnings from Aurobindo Pharma, but barring that Lupin was a great set and the momentum is expected to continue in the United States. The concall commentary was strong. You also have, of course, Divi’s beating expectations by a bit of a margin and then Biocon, the news regarding clearance of their Bengaluru unit will also keep that stock in focus. What within pharma are you liking right now?
Sandip Sabharwal: Yes, Lupin has continued its turnaround path it started two-three years back. So, we had bought in very early into Lupin, but we actually exited around 2000 level, but the company has continued to do well and this performance along with their guidance would sustain the stock performance.
Divi’s, again, after a period of sustained underperformance few quarters back, last few quarters it has been continuously outperforming and that is the reason why the stock has actually also done very well. So, on Divi’s there are two parts. One, on the generic side which is around half the business, they have talked out pricing pressure.
On the CDMO business, they are doing very well. So, there are pulls on both sides. After the move that has happened in the stock, I would think that it is reasonably priced at this time, so it should be something which people should look to buy on corrections rather than buy it at the current price.
What is the deduction now for the entire auto space? Tata Motors, of course, has disappointed. The outlook is positive though, both for JLR as well as the company overall. Ola Electric, again, it is those warranty costs which weighed heavy. Would you say that M&M is the clear out, standout winner and would continue to be so for the next possible future too?
Sandip Sabharwal: I would think so, especially because given the fact that they are doing well in the auto segment also when the rest of the companies are seeing a pressure and they have indicated for a huge pickup in tractors, like as per their guidance in the conference call they are looking at 5% to 6% growth actually moving to 13% to 15% kind of growth in the second half, which is very-very significant because tractors is much more profitable for them than autos. So, when tractors does well, their profitability significantly improves. So, I would think M&M should remain a clear pick on the four-wheeler side, followed by possibly Maruti, then Ashok Leyland, like in the pecking order on the four-wheelers.
After having assessed Ashok Leyland’s quarterly numbers as well, we just spoke with the management and they said that they want to become cash positive. They are pretty optimistic about the second half of the year. What is your takeaway?
Sandip Sabharwal: Ashok Leyland did very well and then it has corrected in line with the correction in the other auto stocks. So, at the current price I would think it is fairly valued because we need to analyse management by management. Ashok Leyland management traditionally has always given optimistic picture but we need to look at the reality on the ground and analyse ourselves. So, if the CV recovery and volumes turn out to be what they are guiding, then the stock could actually do well, but we need to proceed cautiously at this stage.