On Kotak Bank numbers
It has been quite a while since we saw good numbers in banks. Good numbers not in terms of loan growth. Loan growth was actually weak but the pre-provision profits were up very strong, an indication that the company has enough capital to tide over any potential or Covid moratorium whenever that becomes operational.
Second, other than growth, there were other factors like a couple of potential acquisitions by Kotak as well as an MSCI inclusion. A combination of all these has taken the stock up. It is not a particularly cheap stock and the business momentum still has to pick up.
We are getting back on track and in addition to that, over the course of the next several quarters we will continue to see positive data surprising us. Consumption for the second half of this year is far stronger than the first half. Yes, the festivals happen in the second half but that is a good indication that people are beginning to come back and buy all kinds of products and services and by the time you move into the next few quarters, comparisons will start looking really favourable and the growth numbers will look pretty strong.
In addition, the consumption patterns of both electronic, non-electronic durables and auto is picking up and these are big ticket items. Buying an automobile is not a small decision to make and if a consumer is making that decision, then he is fairly confident of his or her job or business prospects a year down the line. This momentum of continued economic activity will be on the right side of the trade for a few quarters to come.
On outlook for L&T
In terms of order momentum, we are going to see a fairly hefty drop. Most important will be the commentary round which will tell us what will happen to the EPC business and the business pick up which is still a couple of quarters away. But for a stock that trades at about 12-13 times, its order book has been fairly strong. Only the question of conversion of that order book into actual revenue has been missing for several obvious reasons. One is Covid, the second is the government’s slowdown and infrastructure spend. One of the key things to watch out for will be the commentary on wherein some of the government contracts, infrastructure contracts coming back to execution because valuation is anyway on its side and that is key for L&T today.
On Angel Broking
Over the last six-eight months, people have stayed at home and discovered broking and many of their trades have turned profitable because they must have got in at fairly low numbers and that has shown up in Angel Broking numbers in terms of its revenue being up by about 70-80%. It has added a large number of brand new customers. We will find out how viable those customers are. Historically, some of the retail investors come and make money and once the curve turns, they get out of the market. But hopefully this time around, the cycle will stand longer. Angel Broking is a good indicator of people coming and trading for the first time. It is a durable trend.
On two-wheeler & tractor makers
Hero MotorCorp is probably losing market share in some of its high-end models but the general consumer is indeed going out and spending both in rural as well as urban areas. Rural India was never really impacted as much as urban India as urban centres were more impacted by Covid.
There were over a million jobs added to the formal sector in August which tells us that there must be a far more number of jobs added in the informal sector that is in SMEs allowing people to go out and buy durable goods. So, this trend is here to stay.
It has been a comparatively better year for rural India with very good monsoon and therefore the demand for rural will be strong. It is now aided by the urban consumers who are coming out of lockdowns and salary cuts are being restored and jobs are coming back.
On US election & market
The market seems to be pricing in a Biden win but even if Trump wins, it is still a positive for the markets. Most importantly, the stimulus will come after the elections and that is what the market is now looking for. It is probably going to be a January phenomenon and in anticipation of that markets will hold up. The election itself is not such a big concern and India is largely a domestic market where more than 70% of the demand is domestic in nature. There is no direct impact on the US-India trade. IT and pharma, both export- related sectors will continue to do well and pharma will do better.
On auto ancillaries
The auto sector has a nearly 50-day inventory of two-wheelers, four-wheelers and various vehicles. The GST collections from the automobile manufacturing sector in Tamil Nadu, Maharashtra and Gujarat are beginning to move up. So with the revival of auto, the auto ancillaries which are the tyres and the battery companies will do well.
JK Tyres or Apollo or even Ceat are inexpensive stocks. JK Tyre trades at about five, six times, Ceat and Apollo also at very reasonable valuations. Amara Raja have not really done much but with OEM picking up and replacement demand coming back, these stocks will do well from this point onwards and we may see a good 20% plus upside on some of these names.
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