Kunj Bansal on Bharti Airtel, Nykaa and pharma stocks

“Bharti Airtel had run up in the last few days, maybe a month, two months or so. As a result, we are seeing some profit booking. However, it is a stock which will continue to give good returns to investors,” says Kunj Bansal, Investment-illiteracy.com.

It seems the Nifty is marching towards an all-time high but let us discuss earnings considering we have seen a beat when it comes to ARPUs from Bharti vis-à-vis what Reliance Jio has reported.
So a few things; one, in terms of the market, specifically Nifty, we crossed 18,000 yesterday and this has been the third or the fourth time. Of course, in the last one month, returns have come to 5% plus specifically for October. But to put it in perspective, on a one-year basis, we are flat, almost zero returns. In October 2021, we had hit a life high in terms of Nifty at 18,500 and that is where we are.

Of course, in that process, the sectoral rotation has happened and in the last one year, the outperformers have turned out to be banking and automobiles and the underperformers have turned out to be IT and metals.

Bharti specifically has given numbers marginally better than expectations. ARPU has come up to Rs 190. Sequentially, it is up 3-4% and on a year-on-year basis, it is significantly up. The expected trend of higher data growth compared to voice growth is also there.

Of course, profitability has significantly improved in terms of EBITDA margin as well as absolute profit. The market was somewhat expecting this and we were seeing the kind of movement that Bharti Airtel had in the last few days, maybe a month, two months or so. As a result, we are seeing some profit booking. However, it is a stock which will continue to give good returns to investors.

Nykaa is 20% up. It is considerably off the highs that we have seen of over Rs 2,000 level and has halved from that price. But it is still a 20% move in one day. Is it now becoming a case of buying at lower values?
I do not know the specific reason for this kind of movement that happened yesterday. Of course, the trend since its listing is visible and not only for this company, it is visible for all the fintech or the digital companies or the platform companies which came in, that are not profitable and which are continuing to make losses and are expected to continue to make losses also.

It was a different kind of market in 2021 when all these listings happened and there was euphoria in the market and the valuation aspect was being kept on the sidelines. There was a lot of participation from domestic investors as well as from the global investors which the anchor books of these IPOs show.

But now, the reality check has been coming in, along with the fact that the old economy sectors or stocks and the other profitable companies are getting noticed. In 2021, the banking sector was continuing to underperform and so investors were probably looking for places to invest in. Automobile was not performing as well. Capital goods had just started to perform. So at that time, they were willing to divert a part of their money to these kinds of opportunities but now that does not seem to be the case, people are looking at profit-making sectors and companies. My view is these kinds of stocks will probably be less fancied going forward.

Sun Pharma and Cipla are the only two large pharma stocks which are sitting at record levels. Lupin with its US generic business is in doldrums; Aurobindo Pharma is still struggling to repay its debt.
Few things to notice: one, at this point of time, the individual companies or the stock price movements in the pharma sector are not moving in line with general sectoral trends. We have seen over the years that there are phases when a particular sector outperforms and all the companies start to outperform in that and there are phases when the sector underperforms, like IT has been underperforming and almost all the companies are in the range of 20% to 40% down from their peak, there are no exceptions.

Similarly, if we come to auto, it has been doing well and almost all the companies are doing well. Again there may be one or two exceptions here or there but not much. Unfortunately, at this point of time, in pharma that is not the case and you are very right in observing that there are few stocks which are at their life highs or at least year highs or record valuations and few which are at their 52-week lows.

Obviously, it has been guided by their individual financial performances, almost all of them have US businesses. For some, it is working, for some it is not working, for some the domestic chemistry is working. So for Sun and the Cipla, their domestic businesses are doing well, not so in terms of the exports and it is the individual business differentiation that is leading to this kind of differentiated stock price performance for these stocks.

I guess OMCs are a skip for you?
For the last one and a half year or so, there is a realisation in the market that some of the PSUs which have been doing well were undervalued and not attracting investors’ money. Of course from the government side also, there is a realisation and a result push to the management of the public sector companies that they should do something which results in financial improvement and as a result, valuation improvement also.

So there have been a lot of measures in terms of divesting the non-core assets, restructuring of businesses, policy support and business support. If we look at all the defence PSUs, we can see what kind of performance they have been giving in share prices and which is being backed by the quarterly financial numbers that we are seeing.

This in turn is being backed by the orders that they have been receiving from the government. In general, PSU as a space got rerated and started to do well. Within that, oil OMCs is a complicated sector. A lot of things are involved – global crude prices, currency, the flexibility to be able to or not be able to raise or of course lower prices. As a result, it becomes difficult for analysts to predict their numbers on a quarterly basis and as a result, investors are also shying away within the broader PSU space from the OMC space.

Based on price to book, HDFC Bank today is trading at a discount to ICICI Bank. The market right now is ignoring the obvious growth which HDFC Bank is reporting and there is this entire fear centred around HDFC Bank because of the merger concerns which in my book are unnecessary? What is your view?
Disagreement is what makes buyers and sellers in the market. I will just add a few things why I agree and disagree with you. There have been some issues with the bank. We know that technologically, RBI more than once asked them to look into their own affairs. So somewhere the market has taken notice of that.

I think there was a second issue of credit cards. They were asked to put the business growth on freeze or something like that for some time. It is in addition to what you said and that is where I will agree and disagree also.

I agree that a lot of companies go through the consolidation phase over a long period of time and that is what leads to the outperformance also, let us keep that in mind. In fact, to add to what you said, ICICI Bank was going through a consolidation or an underperformance for long and now has busted out of its long underperformance.

For two years plus period, it has been outperforming and as a result, for a five-year period now, at least as of today, it is outperforming HDFC Bank. But HDFC Bank along with all these things that are going through consolidation. There was an over ownership probably and that rotation is happening.

There were some issues as well, mainly these two – the technical issue and the credit card issue and the third issue is that at the time of mergers and corporate restructuring announcement, probably incremental money does take a back seat and watches from the sidelines. So while it is very well known what shape it will be, broadly the numbers on a consolidated basis are very well known.