This Diwali has become a bit sombre with the kind of cuts we have seen in the market. It looks like 6% at the index level in this month but if you look at the smallcap, midcap and portfolio level, the cuts are much larger. Given all of that and given we have got a healthy correction, do you have a shopping list ready of some of the stocks that people can look at buying?
Abhijeet Bora: Yes, we have recently released our Diwali picks where we have around 10 stocks. It is a mix of both large and midcap and across various sectors. So, starting with largecap space, we like Reliance Industries, we like Power Grid, we like Jindal Steel, we like Bajaj Finance in the largecap space. And there are a few midcap companies like Gravita is there, Ashoka Buildcon is there. So, it is a mix of both large as well as mid and smallcap stocks where we see that the valuation are reasonable or the growth should pick up.
Tell me about the index level. Do you think it is a reasonable expectation to expect only single digit return from the Nifty this year or we are still going to do more than 12-15%?
Abhijeet Bora: So, the expectation for the broader market especially for Nifty 50 that this year the earnings growth for Nifty 50 companies is expected to grow at 7% to 8%. There has been downgrades in particular sectors like metals, oil and gas from the beginning of the year. So, with a growth of 7-8% in this fiscal year FY25, I think that market is now aligning the expectation to a single digit growth only and ultimately the return should be in line with what the earnings growth expectations are.
Last few years if you see the rally was supported by both earnings growth as well as the expansion in the PE ratio for the overall market. Last few years, three years, the EPS CAGR for Nifty 50 has been 24-25%, so that was the key trigger for the market rally.
But with the expectation getting moderate now, the return should be more in the lines of 7% to 8%. And we see some further correction in the broader markets from current level. In fact, if you see the margin is a lot of concern for many sectors and the revenue growth should be the only earning growth for many of the sectors.
So, all in all, there will be no improvement in the earnings quality per se because margins remain volatile across various sectors. So, the earning growth will mirror the revenue growth. So, we expect that market to remain a bit volatile and on downside. Now coming to your individual picks, Reliance Industries is one of the picks. What is the kind of return potential that you are expecting in the next one year and what is the rationale behind this? And do not you think that this weakness that we are seeing currently in the oil and gas space that could last a little bit longer, which could also weigh on the performance of the share prices?
Abhijeet Bora: So, firstly, we have a target price of 3500 on Reliance and we have a buy rating on the stock. So, there were two key factors for Reliance underperformance. Firstly, the GRMs declined very sharply, which led to earnings cut in its O2C business. Normally, this segment does annual EBITDA of around 62,000 crores, but there has been a cut of 10,000-12,000 crores because of the lower GRMs. Secondly, the retail sales were muted in Q2. It was just 1% QoQ growth while margins were stable. So, these were the two factors which dragged the stock prices along with the FIIs selling. Going forward, what we see that the GRMs should recover to a normalised level of $6-$7 and the RIL’s premium over Singapore GRM is around $3-$3.5 per barrel and they also have petcoke gasification project where they have additional 1% GRM.
So, we believe that with the normalised GRM level of $6, we see a recovery in the overall O2C space and when we value a commodity company or a business like refining and petrochemical, we need to value it on a normalised margin and not the subdued current margins, which are around $3.6 per barrel. Additionally, the new energy business would also drive long-term growth for the shareholders.
While I do have the list of stocks that you are recommending as Diwali picks, what I find amiss in that is that there is no banking name whatsoever. Now, on one hand, they are very well placed in terms of valuations as well as the underperformance that they have done, why would you not feature any of the banking names there?
Abhijeet Bora: See, what we believe that as we have seen the results of IndusInd Bank, many private sector banks are facing issues of deposit and the loan growth. They have to reduce their LDR ratio. So that may impact the overall earnings growth, though the valuation may remain comfortable for majority of the large banks. But all in all, we need to see a systematic growth in the loan portfolio. So, we are awaiting for that thing to play out. And the valuation may remain cheap, but we have to wait for more earnings clarity on that part. And the PSU banks are already at a higher end of the valuation. Most of the large PSU bank close to around 1x price to book value. So, we see limited value creation for the shareholders. Though long term, the sector may do well going forward because as the issues go away, there will be some re-rating on these banking names as well.
JSPL is one of your Diwali picks and you have a target price on that of around Rs 1150. Do not you think that the weakness that we are currently seeing when it comes to steel prices specifically, could weigh on the share prices or could weigh on the company’s financials going forward?
Abhijeet Bora: So, the steel spreads or the margins are close to bottom level. If you see the larger players, they are making ebitda per tonne of Rs 8000 to Rs 9000 per tonne. Why we like Jindal Steel and Power is there are two particular reasons.
Firstly, they are more focusing on flat products, which have better pricing. Secondly, they are focusing on backward integration or there they are targeting to be fully backward integrated with almost 100% coal procurement from captive sources and around 60% for the iron ore.
The value added mix will also improve which will support the margin expansion and when we compare it with other players like JSW Steel which is largely the crude steel manufacturer, the margin gap is quite significant for JSPL on the premium side.
So, we expect that the margin should improve with the ramp up of the new capacities which they are setting up, almost they are expanding their capacity by 65% to almost 16 million tonne.
And with the margin recovery, because it is almost at the bottom end of the cycle, any recovery on that front because coking coal prices are also at around $180 per tonne or iron ore though there has been some pickup in the domestic market was still at reasonable level. Any pickup in the margins may drive a significant rerating for JSPL.
They can increase their EBITDA by 50-60% from FY24 levels and thus we see a lot of value creation opportunity for the shareholders and thus we have a target of 1150.