Both TaMo and M&M poised to do well over next 2-3 years: Nischal Maheshwari

"Hopefully, in the remaining few quarters, we would see a double digit EBITDA margin from ITC. But otherwise, the results have been pretty good. All their divisions have been firing and a lot has been baked into the price. But still in the valuations, a lot of catchup has to be done," says Nischal Maheshwari, CEO-Institutional Equities, Centrum Broking

So much has changed. FIIs are turning out to be buyers in the market, earning season turning out to be good as well; monsoons are good, crude is below $100. Of course, that is not the first time that has happened in recent times. Let us just begin with the auto pack. It has been in the news since the sales numbers are coming in for July. Also there is disappointment as far as Escorts earnings go. What is your pecking order when it comes to this pack?
My preference continues to remain with the CVs and Ashok Leyland in particular, Tata Motors followed by four-wheeler which is Maruti and then the two-wheelers. Tractors form the bottom of the pyramid for us. It is coming from a high base and that is why we are seeing this kind of a disappointing performance.

We do not cover Escorts, but we cover Mahindra & Mahindra. There is a similar kind of situation there. Rural take seems to be a bit slower than usual and that is why both in tractors as well as two-wheelers, we are not seeing the same kind of demand that we are seeing in four-wheelers and CVs.

What do you make of the renewed optimistic guidance from Zomato? Are they now realising that it is important to focus on profit and not just growth? At Rs 40, is the stock pricing in pretty much an existential crisis and post numbers, is there scope for the stock to go higher?
We do not cover it and so cannot say at Rs 40 what all is priced in. I have not done the detailing myself. But I am of the opinion that a new services segment has been created in this country and I do not think food delivery is going to go away from here. It is a convenience which has been created and I believe people across the country are hooked to it.

It has some value now. To understand that value, I need to go through Zomato details. When we cover it, we will be able to come out with fair numbers. But I think that with this downturn in all of the ecommerce plays, one thing has become clear; all of them have to find a path to profitability. They have to come back to the shareholders and convince them that this is a path to profitability and that is the only way for them to sustain because private equity money has sustained them for too long. Now that they are listed, they have to to be cognisant of the listed shareholders.

What is your take on ITC’s numbers? How much of the good is already baked into the price, considering it is at fresh highs?
ITC has done very well in the last three-four months and we expect it to outperform the market. We have been very very positive on ITC for a long time, largely because of valuation but this quarter I am a bit disappointed with FMCG. Though the growth on the top line has been strong, the margins have still continue to allude us. We are at around 7.5% EBITDA margin in our report which had come out. Two years back, we had put ITC in one of our brave heart picks and we had thought that ITC should cross double digit by 2022.

Hopefully, in the remaining few quarters, we would see a double digit EBITDA margin but otherwise, the results have been pretty good. Cigarettes have come back, hotels have come back and so has stationery and paper. All their divisions have been firing and a lot has been baked into it. But still in the valuations, a lot of catchup is to be done. I continue to be a buyer on ITC at these prices.

JK Paper gave a solid performance in the first quarter with a 100% rise in revenues and in operating profit as well. We have seen a rally in the entire paper pack. What is your call on the pack and these stocks?
The stocks have done very well but the performance has also been equally strong and they have once again taken Rs 4 or Rs 5 kg kind of price increase just now. So, at least for a quarter or two, the performance should be good. As far as the current quarter and the next quarter are concerned, schools and colleges are opening up, people once again have started reading newspapers. I guess digital is there but people are catching up on their old habits and school and colleges are definitely giving the fillip to the whole paper industry. We saw that in ITC, especially on the stationary side of the business. I believe at least a quarter or two of stellar results from the paper pack is definitely on. So we are invested in that space.

Break the 5G auctions for us. A BofA report says that Jio has surprised with the 700 MHz and there could be pressure on Bharti again. If Reliance is desperately bidding for spectrum and they are paying $10 billion, will they like to go for market share fight again?
Over the last one year, there has been price increases across the whole space whether it is telephony or data. They have all taken 25-33% price hikes. Obviously with this kind of expansion, Jio is definitely stretched for more bandwidth and that is why it has gone aggressively spending once again acquiring the 5G.

Basically 5G is going to decide who is going to be the market leader in this space because that is a new technology. Jio definitely has an advantage over Bharti because it is in house and they will be able to implement it at a lower cost. That is why they are being aggressive with the spectrum buying. Overall they are looking at the cost of rollout of 5G and that might be cheaper for them than Bharti and that is why this aggression. I do not see a bidding war or a pricing war again starting because it is now a two player market with Vodafone just following. I do not see them trying to kill each other now.

Tata Motors is still flat. If you put money in a fixed deposit, you made more money instead of buying into Tata Motors. Has Mahindra & Mahindra kept it simple and made money for shareholders?
You are asking which stock I prefer?

Do you think that Tata Motors could go the Mahindra way now and after five years of flat performance, could be a wealth creator? Or Mahindra & Mahindra could go the Tata Motors way and after five years of odd performance, may not make money?
Basically both are in very different spaces. According to me, both of them are going to do well. Tata Motors has struggled with the JLR in initial phases but in the last three-four years, barring the Covid period, JLR has been doing pretty well. I believe once Covid is out of the sceneI JLR will start doing well again.

So JLR is not the issue with Tata Motors. The domestic business is doing well for them, especially the cars and they have taken a very clear lead as far as the green vehicles are concerned. In EVs, they are clearly ahead of everybody else or I think almost 70-80% of the market share is with Tata Motors at the moment.

Again on the CV front, we are expecting the CVs to turn around. In both these places, Tata Motors seems to be in a very good spot and so I would continue to be invested in Tata Motors. Mahindra has done very well in the last four-five years. They have sold Ssangyong and solved some of the problems arising out of the situation.

Mahindra & Mahindra surprisingly has done extremely well on the SUV front and yesterday got one lakh bookings in just 30 minutes! They have totally changed the outlook on the company. Now Mahindra & Mahindra is more of a four-wheeler company than a tractor company and that is where the revaluation of Mahindra & Mahindra has started happening. Both Tata Motors and M&M are poised to do very well over the next two-three years.

Why are tractor sales not strong? Escorts numbers were not impressive. The tractor business of Mahindra & Mahindra was not impressive either. There is a seasonality factor. On one side, trucks are doing well and on the other side, tractors are not doing well.
My view is the tractor underperformance is coming from the larger base of last year. That is why we are seeing slower sales. Secondly, this year we were not seeing the same kind of strong recovery in the rural side. If you look at most of the commentaries of the FMCG companies and others, there has been a very strong slowdown as far as rural is concerned.

That is why we are seeing slower sales as far as tractors are concerned. On the hand, trucks sales numbers are coming from a very low base. If I remember right, we are 75% of the pre-Covid level. After almost two, two-and-a-half years, we are seeing some strong pull back as far as construction is concerned. Capex is happening now and these are all the factors which are pushing the sales for trucks. That is why I think trucks are doing well and not tractors.