Monday, November 29, 2021
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Mahindra Finance a value play; no significant upside in Reliance likely from here: Sandip Sabharwal

I do not think Reliance is cheap. It is fairly to slightly higher valued than what it should be intrinsically. News flow and underperformance of the past is driving the price. We might see some more uptick but on an absolute basis, I do not see a very significant upside for Reliance from Rs 2,400 levels, says Sandip Sabharwal, analyst,

Mahindra & Mahindra Financials, which has disappointed the market on all counts for a very long time, has reported that there is a 97% uptick in their collection efficiencies and that could be a catalyst for this entire NBFC space. Do you agree?
M&M Financial has been a unique stock in the sense that one, the management tends to be very optimistic and when things are good, they give out very optimistic projections, Eventually over the last many years, investors have been disappointed. Now we also have bought into this stock lately because we could hardly find any stock from a marquee promoter group in the financial space, which was looking reasonably valued. The good part was that they took most of the write-offs upfront.

Now we are likely to see more recoveries from M&M Financial while many other financial companies and banks could see more stress on their balance sheets going forward. It is a very cheap stock that at Rs 166 is still 40-50% off its 52-week high and 60-70% off its all-time high. I would think that this is one of the very few stocks which is reasonably valued in the financial space and given the promoter group, one can be reasonably sure that major issues will not be there.

This is a value play. A 97% collection efficiency still reflects a 3% gap which is still an additional 3% of NPA. So, it is good incrementally, but we cannot say that they are out of the woods. Many other NBFCs, which are purely retail with a very unsecured book, might be facing similar issues. These are the lingering concerns but overall specific to M&M Financial, I would think it is a value play.

Let us look at other value plays and is one. We are still a primarily thermal based power producer. Is there money to be made in Coal India?
It is very tough to say because the entire ESG investment framework is becoming bigger by the day and that is the reason why many of the oil and gas stocks including ONGC are lagging although oil prices have gone up. Many large investors are no longer looking to invest in these segments. Similarly, coal is one of the biggest polluters and although Coal India by all yardsticks looks good, the stock does not move up. My guess is, if at all, it can be a trading bet. It will not be a long-term bet where it will create value sustainably.

After a long consolidation of almost two quarters, are the indicators now pointing towards a further up move in Reliance?
So I think Reliance underperformed significantly after last year’s moves when all the investments happened in Reliance and although fundamentally nothing much has changed except for announcements which they have made on what investments they will make and most of them will fructify five years down the line or maybe later. But this is a bull market and so news gets lapped up and the stock performed based on that.

Fundamentally, I would say that Reliance is clearly valued at the current prices. I do not think it is cheap. I would say it is fairly to slightly higher valued than what it should be intrinsically. News flow and underperformance of the past is driving the price. It is possible we might see some more uptick but on an absolute basis, I do not see a very significant upside for Reliance from Rs 2,400 levels.

MCX is an exchange and an exchange always makes money whether it is a bull market or a bear market . But with IEX, everybody is saying it is a niche exchange and a play on economy and they will continue to make money and the stock has gone gangbusters ever since it has come in F&O but MCX has not gone gangbusters. What is behind the different performances?
Purely comparing these two, I would think that MCX has no durable business model because it has several commodities in which the trading can happen and to that extent, the volatility in performance should be lesser. Now in a power exchange, it is all question of the market and when there are shortages and when states are looking to buy, and when there is no trading happening. So the fluctuation performance can be quite significant and if it is based on just one commodity sort of power, then obviously the risks are greater. I would say that it is very speculative the move. MCX has so many commodities and over a period of time it has established a track record. It is difficult to understand what is happening with IEX frankly.

You own Indian Hotels. Where is the stock headed?If we do not get a third wave, it seems the real estate sector has turned around and Indian Hotels will be a disproportionate beneficiary?
Yes, it should be and one part that many of the investors are missing out is that like the entire Tata Group, this company also changed the management and subsequently there is a greater focus on expanding the business offerings as well as doing it profitably. Indian Hotels at a point of time used to be exceptional for customers in terms of their services, quality, etc but for shareholders, it was not such a great company.

I believe that going forward, in the next three to five years, Indian Hotels is going to be a company which is going to be good for both customers as well as the shareholders, given the kind of cost cutting they have done during the pandemic time, the operating leverage they have as recovery plays out and the fact that now with their entire managing contract mode of growing they have also expanded at a reasonable pace and they have hotels at many other places at which they were not at. I believe it is a significantly undervalued stock. It will deliver for the patient investors and we still own it.

There continues to be a big overhang of this renewed USFDA inspection spree and the US generic pricing pressure as well. Would opportunities like we had last week when some of these stocks made a comeback, be actually used to sell into?
Possibly because making a case that the entire pharma sector will outperform is not reasonable at this stage. For one, the generic scenario is well known although there is some news flow that the pricing could be bottoming out but that looks unlikely. Also, these companies benefit if the rupee is weak because of exports and the rupee has also strengthened. Now on top of that, the USFDA has started inspections and that could pick up pace going forward because of the fact that they have not done it for a very long time. Overall, as a whole, the sector does not seem to be one which could outperform.

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