Is the market in any mood to rest because it really seems a one-way street up since Wednesday post the verdict?
Well, it always seems like that, naturally when the markets are going up, the risk is actually going up. So, you got to be selective. I think it is easy to get carried away. I think market is trying to build in budget expectations. So, if you see some of the rural economy, some of the consumption stocks are going up, the housing finance companies are going up, and the economy facing stocks are making a comeback after the correction we saw post elections so whether it is railway stocks or the defence stocks they are again back after correcting 20-30%. So, I am just saying you got to be a little selective now. And I think probably need to temper down expectations a bit. That is the only risk in the market. Rest, I think India story is solid. Just wanted your specific take if you track the telecom sector. What do you make of the future for Vodafone Idea if anything?
I think one thing the market is now trying to price in is that it will survive and I think the first worry was that whether it will survive or not. I think the bigger worry from an investor point of view would be how quickly it can build network, how quickly it can win back the lost market share.
They have lost more than 21 crore subscribers since the merger and they continue to bleed every second. Second, if you see the debt levels, their EBIT is currently at about 12,000 crores and the debt servicing is 3x of that, so I think you probably need more capital and all. On fundraise you can then leverage more and take more capital.
So, it is going to be a long haul and at some point of time, there could be some equity dilution as the delayed spectrum payments approach maturity early next year.
So, I am more happy playing it through Bharti to be honest. I think that it is clearly on track. The mobility business continues to do well. It continues to add the highest 5G additions quarter-on-quarter. Industry-leading ARPU. The home and the broadband business also continues to do well and I think it has got re-rated and for the first time I am seeing 12,000-15,000 crores of free cash flows in Bharti after adjusting for all the debt payments, which means there will be a very good financial leverage as well other than operating leverage due to ARPU increase. So, I think it is a more steady play. I agree Vodafone probably the risk reward is higher, but I would still avoid. What about names like ABB, Siemens? They are almost like Trent. I do not think valuations is a parameter that you even judge them with.
It is difficult to put incremental money in these pockets and so ABB is 50 times EV by EBITDA, 80-90 times earnings and probably the next four-five-year order book is probably in the price. Same is the case for Siemens and some of the defence names where you are probably factoring in most of the order book for the next three-four years. So, any rise in commodity prices, any pullback in the orders, right now I do not think the market is factoring anything of that, so while we have a lot of cap goods and infra plays but I do not think so incrementally you can add.You can still add some PSUs like NTPC is still at about 18 times. We are power deficit. We will continue to add more both thermal as there will be a spin-off of the renewable business. Power Grid is another one which is at about 18 times earnings, 5-6% dividend yield. So, those are some pockets. There are a couple of railway ancillaries where probably still we see good margin expansion and it got to be, as I said, very selective now and as I said temper down. I think the worry is that people are getting used to this 30-40% returns, which we know and history tells us are not sustainable year after year.
What is your take about this latest IPO? Of course, Ola might happen soon as well. If you have studied it, what are your initial views on it? And if not, nonetheless, what is the view on the auto sector?
No, I think I am very constructive. I think it is going to be one of the largest IPOs and there is a potential to re-rate the entire auto value chain. What has happened is that if you see the entire world has been on EV and only after Toyota did a study on that hybrid could be the future is when people have realised that you need ICE parts also.
So, China was a hub, it has moved to EV. Europe has its own set of problems supply chain and Ukraine is another strong country which was on ICE auto ancs which is obviously undergoing warlike conditions.
So, Indian auto ancillaries, there has hardly been any capex done on let us say fabrication, let us say forgings, etc. And a lot of the ICE parts and I think a lot of companies may make a comeback.
One of them which has done recently very well and we continue to hold for a very long time is Uno Minda, which is both, it is a nice mix of content, convenience, as well as the EV portfolio in the car. And then you have Sandhar Technologies, which actually makes the frame and the locks for two wheelers and then it is moving into EV portfolio, getting into fabrication, etc.
And there are many more, a lot of forging companies, fabrication companies. So, I think that one space would see some beautiful operating levels because there is hardly any capex there.
So, we are constructive there on the entire value chain. Also we are looking at some of the two-wheeler names and farm equipment plays as government gives a little bit more to the rural economy.
There is still some distress there, which was evident in the whole outcome in key states and there are state elections coming up in Maharashtra, in Haryana, in a few more states. So, there will be more focus on the agri side as well, which augurs well for even two wheeler companies.