Gurmeet Chadha on 3 themes to play in the broader market

Digital and insurance, speciality chemicals and API are the three broad themes we want to look at, says Co-Founder & CEO, Complete Circle Consultants.

Do you think any price is a good price to buy Reliance? Going by the latest CLSA note on Reliance Retail, it seems like there is more headroom in the stock?
Near term I am not sure but if you have a five-year plus horizon, this is one company which will reach a lot of milestones including the $500 billion one and then $1 trillion one. It is the only company which has the chance of doing that. The action is clearly on Reliance Retail now. There is a lot of news around various acquisitions Reliance Retail is doing. They are in touch with Urban Ladder. They have got Netmeds, then Bigbasket which is a big platform. They are clearly on a buying spree and one would watch out for some strategic tie ups there.

Even in the oil to chemical (O2C) space, they have a complex refinery. The yield of chemicals continues to go up globally. Model refineries are trying to increase the yield of chemicals from current level of 24-25%. Then there is also the Saudi Aramco deal. So there are multiple triggers and any dips are welcome in terms of accumulating the stock.

There’s a buzz around a whole host of the midcap financials -- Shriram Transport, L&T Finance, IIFL Finance, IndoStar Capital. Do you like anything from this basket?
I would still be careful in dialling tier two NBFCs to be honest. I think a clear picture will come in one or two quarters from now. We will probably see the restructuring guidelines also coming in very early and we do not yet know how things will shape up in terms of moratorium hit. It is better to stick to tier one private banks and if you want to dial in some risk, may be consider NBFCs with better parentage, great liability profile. Keep an eye on the cost of funds. If the NBFCs are able to raise money both short and medium term, at rates which are comparable to the AAA and other issues, then probably you have to be more focused on the liability side.

I would say may be look at something like an M&M Finance which is trying to reorient and restructure things, look at HDFC Ltd. may be an L&T Finance, But I would still be wary of a Shriram or a Chola where we know the CV portfolio is pretty high.

Can real estate names be bought right now?
Till the time there is clarity on debt levels and how the execution will play out, better to hold out. You can still have some bargain names with stronger ones which are either south-based Godrej Properties and some of the others. I would rather play the home improvement theme.

One thing is very clear with this work from home and in the new world you will see extended expenditure on home improvement. So, go for paint companies, the likes of Polycab and Havells of the world, the CPVC pipe makers, something like Pidilite which is into adhesives and special chemicals which are clear market leaders with great ROEs. I would play the home improvement theme first and then look at debt-free companies with big return ratios, great management and high respect in terms of getting into realty or construction.


ET Now: In the broader markets, which are the themes that you are picking up? Where would you find value right now?
Gurmeet Chadha: Broadly there are three, four themes. Speciality chemicals is one theme, and PI Industries particularly, which is more a hybrid. It involves agrochemicals and is not really a pure speciality chemical but it still looks good. My sense is from Rs 400-500 crore PAT, we could be looking at Rs 1,000 crore plus PAT in the next two years.

Aarti Industries, a benzene-based name, operates on a cost plus conversion basis. It is a great stock to own for the next three to five years.

We like insurance space a lot. Private insurance players are where private banks were 10 years back. You still have LIC with 67% market share and HDFC Life with 6.5-7% market share and a great product mix. Look at the persistency ratio, look at the way they are ramping up and the July insurance numbers were flat. HDFC Life AP on an individual basis grew at double digits. So insurance looks very, very good.

The other theme is digital. That is a large ecosystem we want to play whether you want to do RIL or you want to get into some of the other. So digital and insurance, speciality chemicals and API for us are the three broad themes we want to look at.

What would be your take on banks and financials and specifically RBL?
It is wait and watch for me. I would want to see how the SME and the unsecured book plays out. I want to see the moratorium percentage. Something like a DCB excites me more. In the last few decades, they have been into SME lending, largely working capital. Something like a City Union Bank also. The south-based bank specialises in working capital SME and trade finance, great relationship, great branch network. Something like AU Small Finance Bank which had a great migration from an NBFC to a bank and now they are spreading their footprints beyond their home state which is Rajasthan. Gross NPAs for decades have been sub 2%, now around 2% liability book is shaping up very well. It is becoming more and more granular now. I would dial in some of those names where I have more liability comfort now rather than look at something which is completely beaten down and there is some stress.

So I would not touch an RBL or even IndusInd right now despite the capital raise. I would want to see one or two quarters more in terms of seeing the stability both on the credit cost as well as on the NPA front.