Defence stocks may make 20% plus return if held for 12-18 months: Chakri Lokapriya

“Despite running up, Bharat Electronics is still not an expensive stock. In the case of HAL, we will have lumpy orders because that is the nature of the aeronautics business but the demand cycle is so huge that if you hold these stocks for more than 12 to 18 months, they will make a 20% plus return even from current levels,” says Chakri Lokapriya, CIO & MD, TCG AMC.

What is your outlook on the overall movement in some of these PSU banks. Would you be cautious about dipping into any of them at the current levels or is it a complete avoid now?
PSU banks have done well. If one looks at the earnings upgrade of private banks versus PSU banks, private banks have had an earnings upgrade of 2% to 6%. On the other hand, PSU banks are anywhere between 15% and 30%. So that kind of earnings upgrade takes care of the valuations. Some PSU banks like SBI and Bank of India have seen very strong deposit franchise growth.

In an environment where there is a talk about deposit franchise growth slowing down, one can see SBI, Bank of India among PSBs and ICICI Bank among private banks seeing strong growth. What one needs to do is separate among those banks which have a deposit franchise growth, even within PSUs, SBI fits in that category, BOI and Canara Bank all have valuations still on their side even after a run up. Therefore they continue to look good.

What happens in the defence pack if you miss the party? HAL, BEL and even Mazagon Dock are now too expensive to enter. Is the long term story so intact that we still have the endeavour to be atmanirbhar (self-reliant)? Will there be more contracts, more tenders?
Atmanirbhar is a very powerful theme and it is such a friendly theme which was started well ahead of the Ukraine war which led to a further rush for self-reliance around the world. Defence is a very important component. Despite running up, Bharat Electronics is still not an expensive stock. Its avenues for growth are expanding into newer lines of businesses. Yes it is a PSU and so there will be some amount of ploughing back of excess profits.

In the case of HAL again, we will have lumpy orders because that is the nature of the aeronautics business but the demand cycle is so huge that if you hold these stocks for more than 12 to 18 months, they will make a 20% plus return even from current levels.

What is the outlook when it comes to Bharti Airtel? Brokerages are of the view that there could be a 15% consolidated EBITDA CAGR for Bharti Airtel over FY22 to FY25 and that is going to be a huge positive and allow some of these telecos to monetise 5G. Does this hold a lot of potential for the likes of Bharti Airtel?
Bharti is well placed in the telecom pack. The 5G spectrum will be a big capex drain on the company and for the other sectors but by next Diwali, the rollout needs to reach certain milestones. So between now and then, for the regular 4G services, they are going to increase tariffs another 40-50% depending on the circles.

That is going to aid cash flow and Vodafone is in no real good shape to compete versus Bharti. Jio is the only other kid on the block. So this is a three horse race and Bharti is well placed. While the stock has done well, fundamentally it still looks good with the caveat that it is a high debt company. If there is an inability to pass through price hikes and raise ARPU, then it is not good for them.

There is a lot of confusion around these fintech stocks not about the business model but anchor lock-ins ending and big anchors selling out. For example, TPG has sold out Nykaa, SoftBank has cut 25% Paytm stake. Some of the anchor lock-ins of Policybazaar are selling out. Is there a risk of oversupply could that linger for next few quarters and only sellers being there?
There are two things; one, the anchors invested in these companies at much higher valuations and since then, the valuations have gone down 50-60% or more. So there is therefore a mark to the mass market of their portfolios and they might as well realise their losses.

This also helps in the case of portfolio tax planning. So that can also be a very valid reason to exit out of loss-making stocks. Second, is if you look at the overall fintech space, when the valuations are originally based in a high market in an environment when the US interest rates were less than half of where they are today, at that point the terminal risk-on trade that was being used for all the fintech technology product companies and fintech stocks was based on terminal growth rate discount of 2.5%. It has more than doubled since.

So, today, the cost of capital in case of discounting the fintech stocks is moved from 2.5% to north of 5.5%, which means even if we just do that mathematics, the stocks are worth half where they were one year ago-one and a half years ago. They are not what you call cheap at this point and therefore we will see some amount of increased supply as the anchor’s exit.

Which is the recent IPO where you have invested? Let us keep fintech consumer tech aside. Apart from that, what else?
We have not invested in any IPOs in the recent past. Archean Chemicals was a very small company, about a Rs 1,000 crore company. It is a specialty chemical which makes bromide. Bromide is a chemical which is in short supply in India and it also has worldwide applications in industrials and they also make industrial salt.

Industrial salt is used across various industries. The company listed yesterday at a valuation where the price is close to Tata Chemicals, which is a far larger company, because of the scarcity premium of bromide. The company closed 10-12% above its listing price yesterday which means in case there is any shock to the market, these kinds of stocks will come off. I think the pricing of the IPOs are not leaving enough money on the table.

When the news of imposition of duty on steel exports came out, steel stocks went down 10-15%,. Now that the duty has been rolled back, steel stocks should have gone higher?
Well between then and now, the world has changed and the fears of recession are becoming stronger. Today after even the duty rollback, the parity price between domestic steel prices and foreign steel prices does not place Indian steel companies in a hugely competitive advantage price-wise.

So they are more or less at the same price, depending upon the company and product whereas on the other hand, a company like Jindal Steel and Power has a greater export component. One of their divisions is building a coal plant in one of the African nations but they have demerged that business.

Companies which have a bigger export market share like Tata Steel which has two different entities; it has factories in Europe and factories in India. Jindal Steel has quite a strong export base. Against this, slowing demand globally with recession fears and the prices of steel both imported and domestic coming back even after removing the duty does not give any earnings upgrade to Indian Steel companies. That is the reason we saw a muted reaction.