Would you be a buyer in banks in the short term or would you say this is more a longer-term story?
I believe that we are flying blind right now. We have no idea how much the moratorium impact is on banks, how much of these are NPAs. They are not going to tell us until the end of November. A massive amount of restructuring is going to happen. We have seen Shapoorji Pallonji default on a commercial paper of Rs 100 crore and that is a signal. It is not that Shapoorji does not have Rs 100 crore but it is a signal for the banks to come to the negotiating table and say we need to restructure, we may need to delay payments, reset interest rates and so on. This is now going to be followed as a pattern by a number of companies that need help especially in the real estate sector. Banks are going to have to apportion a substantial amount of capital for this restructuring.
Remember with a 10% provisioning, if you reset or restructure about Rs 5 lakh crore of loans, that is Rs 50,000 crores in capital which will have to be allocated against those loans and Rs 5 lakh crore is a very small estimate on the number of loans that will have to be restructured. So given that, from now to the end of November, you should watch and not buy. We are out of nearly all of our banking positions. We are waiting.
We are only into maybe gold loan NBFCs but there it is collateral secured for the most part so we are not really worried about it as much. Banks are going to face headwinds. The Supreme Court decision notwithstanding the restructuring and impact of certain other RBI circulars causing me to say just wait till November end, let us get a better picture and then we will get much better prices as well.
How are you looking at oil and gas? ONGC has been in focus of late with respect to Reliance as well. What would you bet on?
The marketing companies will have some interest right now within the oil and gas space. There is a lot of talk about whether BPCL will be sold this year or not, but they might actually make something out of marketing margins. Volumes were not very good on diesel and the July numbers are a little unsatisfactory, but petrol has been rising in terms of consumption ever since the lockdowns have been lifted. The consumption part of the marketing companies will start to do well. I am not so sure about ONGC per se. There is a lot of crude dependence there and while the company is not very richly priced, the reason for that has more to do with governance than to do with their fundamentals. So not doing any of the public sector players. We are not interested in those yet. We are interested in Reliance but then oil and gas is the least useful reason to buy Reliance right now, but I do feel that there might be some announcements coming that way by the end of this year. So by and large, the interest is in the marketing part of the OMCs but not so much in the upstream players.
“Even a marginal increase in prices will help Bharti. However, I do not see this happening in 2020. Actually, 2022-2023 is the earliest time you might see a pop in the price.”
The Bharti underperformance is puzzling. Why is Bharti Airtel getting badgered?
As a shareholder, I feel miserable about this but then I think longer term, they will prevail in terms of being one of the top two. They are still very strong in broadband. The Jio fee structure has spooked a few shareholders perhaps and also the fact that they are relatively not as well positioned as Jio is. However, they are far better positioned than Idea and even though Idea is showing signs of trying to fight, their cash flow issues will start to pop up in the early part of next year. Given that they might not receive any serious amount of funding, we are going to go back to the drawing table on that one.
So Bharti will take a little bit longer. However, the data consumption is going to grow. There is almost no choice for it but to grow fairly largely and exponentially from here, especially as we are seeing all of this– even parts of work from home staying, education becomes more online. A lot of our news consumption is now more online than it is from a cable network. It is just that the data consumption in India will keep going up and being one of the players, Bharti will prevail. Even a marginal increase in prices will help them. However, I do not see this happening in 2020. Actually, 2022-2023 is the earliest time you might see a pop in the price.
How are you looking at the entire consumption basket? HUL is in focus and brokerages are talking about how near term hiccups are likely but the long-term prospects remain quite bright.What do you like in this space?
HUL is probably in a range but most of the consumption stocks are priced at extremely high levels, be it Nestle or Colgate or even Godrej or Marico. We have been owners of them, we have said there is not that much upside from here in terms of valuation. I expect growth to be early double digits or probably 10-12%, given all the bullishness that seems to be there. You might see a temporary jump right now. We saw that in Q1 in some of the players but I do not think this will come anywhere close to 20-25% and that is why the basket is not so great.
I am still positive on some of the liquor players there. We think even though we have had a lull in consumption recently, an opening up will result in bars coming back and perhaps some part of that economy coming back for them and that might benefit in the near term.
Some of the pricing has corrected meaningfully for us to enter the stocks. Other than that, I am not very big on the consumption or the staples basket. Among durables, auto is showing some signs of recovery and I hope we will be able to see better numbers in October, November and December.
I do not feel this is a good time to start picking in auto. I have been an auto shareholder for a long time and I will obviously be biased but that part of durables continues to excite me.