Elections and results are going to be paramount in terms of helping people, at least in providing short term direction. The
longer-term direction will come from policy changes, said Deepak Shenoy, Founder, Capital Mind, in an interview with ETNOW.
The broader end of the market which was up until now holding out, has too succumbed to selling pressure. Crude is at $70, the earning season is about to start. Is it election jitters? Where do you see us headed?
From the point of view of
, elections and results are going to be paramount in terms of helping people, at least in providing short term direction. The longer-term direction will come from policy changes. Effectively, what is going to happen when the new government comes into place and that call is going to be only in July when more evidence will come in. The manifestos are okay but at this point, the manifestos do not always translate into reality in any meaningful form.
Crude at $70 sounds big but to be fair, in last five years, we have hardly seen any inflation in the whole retail petrol or diesel prices and crude at $70 with the dollar at 69, is not a major problem for us. Of course, if it crosses $85, then we would have some challenges but otherwise not. Crude is at about $70 and a lot more supply is waiting to come on board. When it does come on board, crude will correct to the low 70 again. I am not really worried about crude but more worried about election mandates and the budgets.
What are you making of this M&A heavy weak that we have had? There is the LVB- Indiabulls Housing deal and with RBI’s proactive measure of not really giving it a clear approval, things still seem a little hazy. What do you think is in it for minority shareholders of both parties?
LVB has been in some kind of trouble and Indiabulls Finance had almost faced clampdown on further lending. It was not distributing fresh money. Although it has a tremendous amount of cash sitting on its balance sheet even now. it has not really kick started lending operations in a meaningful manner.
A merger will help them more. Whether RBI will approve this we do not know because: a) it brings Indiabulls’ Founders into management position in a bank. Indiabulls founders or promoters actually have ventures in non-banking areas including power and real estate and a bunch of other places as well.
So, RBI has generally bought it even in Kotak Mahindra’s case. The idea was that only Uday Kotak could be running the show and Mahindra would not really be running part of that show and did not have any other bank being given permission which comes in from an industrial house like Birlas or the Tatas.
I feel this merger proposal will not get merger approval from RBI in any meaningful time. It may be a requirement that they separate their non-finance businesses away. They will have to merge IB ventures also. They may be asked to create a structure that disengages the non-financial parts of the business completely from financial part of the business. I do not think RBI will give permission and so I do not think minority shareholders should rest their hopes in any near term point and in fact, look for disappointments rather than an outright okay.
What did you make of the Baring-NIIT Tech deal? Is this actually win-win for NIIT Ltd shareholders because they are the ones which are going to gain form of dividends or even buyback announcements?
Yes, I think that is the real impact because NIIT Tech itself is not getting valued a lot more than its current share price. NIIT Ltd would get Rs 2,000 crore of cash and its market cap is about 10% below that. But what is crucial is to understand what happens if they distribute the income as dividend as they are going to pay 20% tax which would bring down the earnings. They will pay another 20% dividend distribution tax. They want to distribute all of that money. That would still mean a Rs 1,200-crore distributable surplus if they were to choose to distribute all of that money.
I do not know what the intentions are. I have not actually seen any commentary about exact distribution but I believe that if the management at least states its instant intentions of distributing 50%, 75% of that, then the stock obviously is a worthwhile look from dividend yield perspective. Depending on what they want to do with the rest of the money, that is still an interesting part.
Second. whenever a new government comes into power it outpace brings in something for education as well which typically tends to benefit a company like NIIT you have seen that in 2014 as well so that might be a near term fillip for the share if that were to happen as well. So it is quite interesting from an angle of looking at NIIT itself.
I personally do not feel that there is anything bad and stigmatic about the promoters and therefore it is worthwhile to look at it. We will get more clarity in a couple of days.
How are you looking at the prospects for the real estate space? Where are you placing your bets?
We have been negative on real estate for the longest time and I think this quarter we are starting to see some signs of life. It is very early and I do not know whether this will sustain but essentially there has been a massive amount of deleveraging in the last two years by a lot of the players.
Companies like Oberoi Realty have always had very little debt as is the case with Godrej also. DLF also after the QIP and the pumping in of the promoter money is going to have a lot less debt than it used to do. A few other players have also been able to control or reduce the amount of debt that is on their books.
Secondly RERA has helped the big players by eliminating competition from some of the small payers in that respect and also because of their healthier balance sheets, they are able to take over some of these smaller balance sheet companies because they have better compliance and stronger balance sheets. They can hold on to the debt as well where they come.
Deleveraging from that perspective, produces a situation in the market where if home sales were to start to recover, we should start seeing the upcycle for real estate maybe in a little while from now. Real estate will also depend on interest rates coming down. Right now, it has not but I believe housing finance loans will start to come down towards the later part of this year.
Right now, there is a bit of a dip in the market because NBFCs in the housing finance area have seen their costs go up quite substantially. It is only when those cost come down, that real estate end user rates will start coming down.
I also believe supply will increase because of auctioning of assets and therefore there will be more people interested in buying and that cycle will play out.
It will be positive for real estate in the long term. I am looking for early signs. With strong and healthy players, not with ones that are saddled with too much debt, Oberoi Realty is one of the companies that we are looking at but that is also because Mumbai has this unnatural love for real estate and Oberoi is most focused in that territory. The other players will also start looking interesting whether it is Brigade of Sobha or some of the others as well. The opportunities will start coming. I would suggest, wait for results and then take a call.
What is your view on RCom and what you are making of the latest news?
I am not tracking it. I do not know what to say about RCom because what is left in that company is not something I am sure of at this point.
If you want to play telecom, the players in the right order are perhaps Reliance Jio which has to be a proxy through Reliance for now and Bharti Airtel. Then comes Voda-Idea. I would not even touch RCom with a barge pole at this point. It has been a sad story but going with the elder brother on this one is probably a better bet than with Reliance Communications itself.
How are you looking at the potential in Vodafone-Idea? I noticed, it still came third in your list.
Yes, so there is a tremendous amount of competition. The battle still rages on. Of the Rs 25,000-crore issue, I want to see how much of the non-promoter stake, which is about Rs 7,000 crore is subscribed.
I hope we do not see any negative surprises there but even if there is, not most of this Rs 25,000 crore will go to retire debt. They will have to take on some more debt at the time of 5G auctions. They need to streamline operations tremendously. So, a good portion of any amount spent today will be visible in earnings only two years from now. Any infrastructure upgrades or pretty much whatever you need to do just to be a player in this game, is going to be just playing catch up at this point. They are the biggest telecom player by numbers today but that position will be lost unless they start showing a bit of turnaround in operations.
There is some hope. There is an increase in prices happening as we speak from Bharti and from Reliance Jio, but in the content game, Reliance and Bharti both are way ahead of Vodafone. They have to up their ante and that will take more money as well. At this point, I am sceptical and would just wait and watch on the sidelines, I am not a buyer in Vodafone-Idea.