Why Rajesh Kothari Is Not Constructive On Oil Marketing Companies | Talking Point With Niraj Shah
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00:00Tata Motors has been a big loser today because UBS has retained the sell rating on the company
00:05with the target price of 825.
00:07More importantly, BMW has come in and cut their targets on global slowdown factors which
00:15will obviously impact all global car companies, JLR included.
00:19Puneet, my colleague joins in with some highlights of the note on Tata Motors and then maybe
00:24a brief update on what BMW has said too.
00:26Puneet, good morning.
00:27Hi Niyaz, good morning.
00:29So definitely a negative for Tata Motors and stock is reacting on this UBS note.
00:34This note specifically talks about the JLR division of the company and how the higher
00:38discounts that they're offering now will be a key negative going forward as well.
00:42They have mentioned that the Range Rover Sport has seen a very sharp and a surprise rise
00:47in discounts in the month of July globally as well that they've announced.
00:51It mentioned that the company has launched these three models, the Defender as well as
00:55the two Range Rovers back in 2020 and over the last three to four years they've seen
00:59successful rollouts of the same.
01:01But now that momentum seems to have slowed down and new launches will only be happening
01:05in the next year when JLR comes up with the electric vehicles going forward as well.
01:09Now they're transitioning away from, you know, petrol and diesel completely.
01:12So that's one of the key things also to watch out for that they will have to, you know,
01:16support growth only through pricing mechanisms going forward.
01:19Now order book is another key metric track here.
01:22It's at a record low pre-COVID, it's, you know, touched the low, which it had seen last
01:26in 2019 itself.
01:27So that's another key thing to watch out for that the growth momentum hasn't come forward.
01:31They have mentioned that average selling prices of their cars also has gone up by roughly
01:3549% compared to four years ago.
01:37And now they will have to start moderating them going forward as well because of, you
01:41know, the affordability factor as well as, you know, customer having a larger choice
01:44as well with competitors.
01:46Finally, you know, they have mentioned that they wouldn't be surprised to see, you know,
01:49some discounts on the Range Rover as well as, you know, near the is currently a near
01:54zero level of discount on one particular model, the top one.
01:57And they're saying that they might be seeing on that.
01:59Finally, valuations.
02:00They see JLR at roughly seven times price to earnings.
02:03And I've seen 10 to 14 times price EV by EBITDA for the CV as well as the passenger vehicle
02:08division.
02:09Both of them are slightly in, you know, struggling zone right now and recovery is only penciled
02:12in the second half.
02:13So overall, you know, slightly negative picture on India business and, you know, JLR, they
02:18have mentioned that, you know, it's not a good time for, you know, the company itself.
02:21Back to you.
02:22Okay.
02:23Thanks for that, Puneet.
02:24Quick 30 seconds.
02:25BMW sounded on the bugle of caution as well.
02:28Yeah, definitely.
02:29You know, it's a very big negative news coming in from BMW in Europe specifically.
02:35It just highlights and quantifies what they're going through.
02:38They have mentioned that, you know, they've cut their EBIT margin guidance to 6% from
02:42roughly 10% last year.
02:44Free cash flow is another thing.
02:45It will be roughly at 4 billion Euros for the automotive division versus 6.9 billion
02:48as reported in the same time last year.
02:51And some Indian suppliers that we looked at, you know, Motherson would be one of the key
02:54ones that would be affected because they have roughly 4,900 odd crores of revenue coming
02:58from BMW.
02:59That's roughly 5% only for them, but still a big impact compared to others.
03:03The other two, three companies would be Uno Minda, Minda Corp, as well as Endurance because
03:07they are very big companies having exposure to Europe.
03:10They also have joint ventures there.
03:12So watch out for these stocks in trade today on the back of this news from BMW.
03:17Back to you.
03:18Thanks for that, Puneet.
03:21Well, let's get in Rajesh Kothari, MD of Alphacurate Advisors on the conversation as well.
03:26Rajesh, great having you.
03:27Thanks for taking the time out.
03:28And, you know, I'm going to take a leaf out of what's happened, the recency bias in the
03:32markets to start off the conversation.
03:36On the global front, BMW and some of the other automakers sounding off the caution bells,
03:42people are talking about the same when it comes to four-wheeler inventory in India.
03:46And what are the kind of discounts on offer during the festive season?
03:49Something that we probably haven't seen since 2019.
03:52Are you sensing, Rajesh, that urban discretionary consumption or urban consumption at large
04:00is slowing down?
04:02Is that indicative of what could happen to the economy?
04:07Hi, Neeraj.
04:08I think, you know, Neeraj, there are pockets of consumption which are doing extremely well.
04:14And there are pockets of consumption which are, I would say, a little bit moderating.
04:18And there are, of course, pockets of consumption which are still not yet improving, they are
04:22still in the slow lane.
04:23I think what is happening is that the Indian consumer, the entire wallet, the spend of
04:27that wallet is changing.
04:28It is not a, you know, macro thing that consumption is slowing down.
04:33I think that would be a wrong judgment.
04:34For example, if you look at the entire car industry, the premium end of the car is doing
04:38extremely well.
04:39It is, the problem is that, you know, I would say below 10 lakhs or even a little bit of
04:45the mid-size.
04:46But the premium car segment is doing extremely well.
04:48If you look at the real estate registrations, they are doing extremely well.
04:51And within that, if you look at the premium real estate, it is doing extraordinarily well.
04:57So I think there are basically patterns which are happening.
05:00The wallet of the consumer is changing.
05:03And companies which are rightly positioned to those wallets, they are basically becoming
05:08gainers because then the profit pool is expanding disproportionately.
05:12So, you know, I think it is less to do with the, you know, judgment in terms of the overall
05:18economy.
05:19But I think there are pockets which are yet to improve and there are pockets which are
05:23strengthening.
05:24Okay.
05:25And right now we're talking just about urban, right, Rajesh, you believe that even not,
05:31I'm not even focusing on rural or maybe you take an overall consumption because the common
05:35belief, Rajesh, seems to be, or the sense that I'm getting when I'm doing these conversations
05:40is that rural is making a comeback and urban is slowing down.
05:44You are saying that that's not necessarily accurate across the board.
05:49It is not necessarily accurate because the urban, as I'm saying, every pockets, whether
05:54it is a rural, whether it is an urban, there are pockets which are doing well, there are
05:58pockets which are not doing well.
06:01That keeps changing, right?
06:02The wallet share is changing and that's what is very, very important to understand because
06:06ultimately, please understand, we all need to finally decide which are the companies
06:11which are rightly positioned for those profit pools.
06:13If you have that kind of companies, you know, while constructing portfolio, you will do
06:18well.
06:19If you are on the other side, definitely you will not do well.
06:21So macro, broad indicator, I think, you know, there is nothing that the consumption is slowing
06:28because then what is rural, what is urban, what is semi-rural, what is semi-urban, all
06:32are very, very loose terms.
06:35I don't think there are any indices by the government which says that urban consumption
06:40versus rural consumption.
06:41Got it.
06:42Fair point.
06:43And in fact, well, some companies have also made this point to an extent while there are
06:49broad buckets, but it's very difficult to kind of alienate one versus the other.
06:53So in some cases, companies have mentioned that too.
06:56So point well taken.
06:58Rajesh, let's talk about profit pools then, assuming that it's difficult to predict what
07:01the markets will do over the course of the next six months, because we've been calling
07:05and crying wolf about the valuations for a while, but the market has a mind of its own.
07:09So let's leave that question out.
07:13I want to talk about this argument that you make very correctly about profit pools.
07:17And so identify for us, according to you, where are the two or three or four largest
07:24pools of profit available over the course of the next five years, and which businesses
07:29are probably primed to take advantage of those profit pools?
07:34So one is, of course, the energy transition, the green side of energy, that is one of the
07:41largest, I would say, incrementally growth perspective is one important segment.
07:45A second important segment is a data center-related capex.
07:50And when you put up one data center, roughly 40% of that cost goes for the electrification.
07:56So it means all types of electric machines, which gets involved, be it a transformer,
08:01and so on and so forth.
08:02The third important segment is the HVDC part of the power transmission.
08:08One is normal power transmission, like normal consumption, there is a normal power transmission.
08:13But then there is an HVDC-related transmission, very incrementally, significantly high growth
08:18going to be into that part of the segment.
08:21When it comes to the automobile and auto insularities, the content per vehicle, the disproportionate
08:27increase there, be it airbags, be it sensors, be it automation, be it alloy wheels, and
08:34premiumization of that content.
08:36When it talks about the consumption side, a company which can meet the aspirational
08:43at an affordable price, there is a huge demand, but at the right price point.
08:48And there are only one or two or three companies which can meet those aspirations at that price
08:53point.
08:54And these companies are growing 25%, 30%, 40%.
08:57They are not complaining about any slowdown, be it rural, be it urban, be it semi-metros.
09:02When it comes to the pharma side, the CDMO side of it, the huge profit pool opportunity
09:08over the next three to five years.
09:09So there are companies which are rightly positioned to capitalize on the U-turn on the US companies'
09:15incrementally spending more on R&D.
09:19If you talk about, for example, the building materials, the wires and cable side, over
09:24the next two, three, four years, you will see more growth on wire and cable side.
09:29If you talk about real estate, there are pockets where premium segment, not affordable side
09:34of it, mid to premium segment is growing disproportionately.
09:38That's another profit pool opportunity.
09:40If you talk about banking, the housing finance is one bigger growth opportunity compared
09:45to the normal banking trends.
09:47For each sector, Neeraj, what I'm trying to say is that for each sector, you need to do
09:52segmentization and then within each segment, which are the right companies positioned to
09:58capitalize on their growth and position your portfolio accordingly will make significant
10:04amount of wealth over the next three to five years.
10:05I'm going to take your real estate point as the last question of this conversation.
10:09Before that, the second last point of this conversation, Rajesh, is on something that
10:14has become a big talking point, which is the correction in crude prices.
10:18Now, a lot of views around how the near-term profitability of the oil marketing companies,
10:26for example, will look very solid as a result of this fall, particularly companies which
10:30have a lower refining and a higher marketing piece within that.
10:33There are three names out there.
10:34I'm not going to ask you about stock ideas out there, but just trying to understand,
10:38are you constructive oil marketing companies because of this crude price fall, which looks
10:42slightly more structural, or would you avoid them?
10:46Why or why not?
10:47Well, Neeraj, as you are aware, we strongly believe that we should focus only on constructing
10:55portfolios in the companies where we have some competence to predict the earnings power.
11:01So we do not buy oil marketing companies, generally speaking, we avoid this entire basket
11:06because we believe we cannot predict the crude oil.
11:08And it's just not about the crude oil, it is also about the tariffs.
11:11It is just not about the tariffs, it is also about the government policy of petrol and
11:15diesel prices.
11:16Now, all these things are beyond anyone's ability to predict, and therefore, we continue
11:22to avoid buying that in this case.
11:24There are enough opportunities available in the market, while people keep talking about
11:29valuations going all-time high and all that stuff, but there are enough opportunities
11:33in the market, even at the current valuations, where there are companies which are growing
11:3718, 20, 25 percent, think of it, India's largest company, I mean, Reliance Industry and AGM,
11:44please put a disclaimer, we do want it, in AGM talking about doubling EBITDA in 4 to
11:485 years.
11:49Now, this is one of the largest financial company in India, is talking about doubling
11:53EBITDA.
11:54I am not talking about a mid-cap, I am not talking about a small-cap, I am not talking
11:57about a micro-cap.
11:58So, you can imagine the kind of growth opportunity available for many companies is pretty large,
12:04is probably significantly larger than what probably right now market is expecting in
12:09their consensus estimate, and that's why probably the market is not falling to that extent,
12:16because market is looking at the future earnings power, and those are the all-new growth drivers,
12:22those are no more the traditional growth drivers, and they are growing disproportionately,
12:26because new growth drivers, they are not growing 10, 12 percent compounded, they are
12:30growing 20 to 30 percent compounded.
12:32So, for any company, if that new growth driver is going to become 25, 30, 40, 50 percent
12:38of their business over the next 4 to 5 years, then your overall growth gets higher from
12:4412 percent to 18 percent, correct?
12:46Got it, got it.
12:47And then, if you look at the valuations, they are still at, you know, almost equal to 10
12:51years average valuations.
12:52Okay.
12:53Well, a constructive note out there, Rajesh, one minute, because we have a management waiting,
12:57but I saved that for the last, simply because I heard you mention about companies which
13:01are in the mid-end of the housing segment, right?
13:07Something like that you mentioned, not the premium housing, but the other side.
13:10So, the company next probably specializes in that, that's Brigade Enterprises.
13:14I'm trying to ask you, if you had a question to ask to a company which is engaged in that
13:20business, what would that question be?
13:22What is it that you would want to know from a company which is doing that, which has increased
13:26the base over the last 3 years?
13:28What is that one thing that you would want to know from such a management?
13:31For any real estate company, the question always is only one question, what is the current
13:36inventory and inventory to sales ratio over the next 2 to 3 years at the industry level?
13:41I'm talking about a particular region.
13:42Say, for example, you're talking about say Brigade, then we should ask the segment in
13:46which they are into.
13:47Say, for example, Bangalore, how is the inventory of the industry moving and what is the pipeline?
13:52The pipeline to inventory to consumption, that basically drives the pre-sales and the
13:57pre-sales moves to EBITDA over a period of 2 to 3 years and that's what basically moves
14:01your stock price.
14:02Okay.
14:03Well, from a stock price perspective, that is the most pertinent question that we will
14:07ask Pavitra Shankar and some more, but Rajesh, so good talking to you, lovely talk about
14:11the profit pools yet again.
14:13We should try and engage into this conversation at a slightly longer level some other time,
14:17but thank you so much for joining us today.