Current rally picked up pace as earnings season got on: Vivek Mavani

BEL and KEI are two of Vivek Mavani’s midcap favourites.

ETMarkets.com
A large number of companies have shown expansion of margins.
Earnings have beaten street expectations on margins as well as on the outlook going forward, says Vivek Mavani, Independent Investment Advisor. Excerpts from an interview with ETNOW.

What do you make of the earnings season so far?
As far as earnings are concerned, This is one of the better earnings seasons anytime in the last three or four years. In the last 12 to 15 quarters, this probably is one of the better ones. The number of disappointments so far have been much less. Lots of companies have beaten the street expectations. I am evening out the earnings growth because of the tax adjustments which a lot of companies have done because in the middle of the quarter, we have had the tax cuts. A lot of companies have adjusted that in the second quarter, but if I look at pre tax profit or EBITDA, a large number of companies have shown expansion of margins. They have beaten street expectations on margins as well as on the outlook going forward while managements have been slightly more optimistic than the Street. The market levels seems to be suggesting that the current rally picked up pace as the earnings season got on.



What have you made of not just Dabur’s earnings today in terms of the kind of volume growth they delivered, but also some of the other consumption and FMCG names as a whole?
FMCGs have been delivering consistently on the earnings. But valuations is something that is slightly discomforting in the sense that the very high quality names like HUL, Nestle and 3M or AstraZeneca and Pfizer in the pharma space, have been trading in 60 to 90 times range. But at the same time, one really does not have the courage to go out and sell those stocks.

Funnily enough, all the incremental money in the market is also chasing only these stocks. There was a study done as to where are the incremental flows going in terms of what stocks are getting bought into in terms of top 50, 51 to 100 and so on. Some of these stocks saw incremental fund flows in the market as far as institutional flows is concerned. Neither are these declining, the existing investors are not selling in a big way and they continue to see buying interest notwithstanding the fact that all of them are growing at high single digit or low double digits.

None of them really are growing at convincing 30-40% growth rate so that you would still want to buy them. Nevertheless, among the consumer FMCG companies, Dabur, at least on valuation is slightly lower, of course, it makes up with a slightly lower return on capital and return on equity vis-à-vis other FMCG space.

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On the longer term perspective, Dabur is relatively better placed with a product profile where the world is moving towards preventive healthcare and more towards herbal ayurvedic medicines. That clearly is a trend in India and Dabur is well placed to capitalise on that at least they have the right products at the right place. We need a greater management aggression, which we see in Patanjali. If that kind of aggression were to be in Dabur, probably the stock price would be much more.

Within the midcap universe, what are you buying at the current levels?
Bharat Electronics is something that is interesting to me. The results disappointed with almost 35% fall in pre-tax profit margins, declining from may be about 25% EBITDA margins same quarter last year to about 19% this year.

But this is a company that one does not look at quarter by quarter. One looks at annualised trends. They have a very robust order book of Rs 56,000 crore which is more than four years of revenue. Even if you account for the growth, it is more than three years of revenues going at the current rate. That’s a terrific track record in terms of consistency, year after year, not necessarily quarter by quarter.

A debt free very strong balance sheet delivers 17-18% return on equity and from the valuation point of view just about nine times EV/EBITDA about 13-14 times earnings. Bharat Electronics (BEL) is something that I find attractive. A disclaimer, we already have an interest in that.

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KEI is another stock which I find interesting and worth accumulating at lower levels. Again, it has a very good track record in terms of consistency of growth, margins, return on capital, return on equity, cash flows. All the numbers that you put in and the valuation at Rs 545-550 is not very demanding. This is another atocks that I would be accumulating on declines.
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